Pricing and used product collection strategies in a two-period closed-loop supply chain under greening level and effort dependent demand

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Abstract

This article presents a two-period closed-loop green supply chain model with a single manufacturer and a single retailer to investigate the impact of green innovation, marketing effort and collection rate of used products on the supply chain decisions. The market demand of the green product is assumed to be dependent on the selling price, greening level and marketing effort. In the first period, the manufacturer produces new product from fresh raw materials while in the second period, besides manufacturing new products, he also collects and remanufactures used products. The centralized model and three decentralized models (depending on the manufacturer’s collection option of used products) are considered. A cost sharing contract is also employed to address the coordination issue. The optimal results are obtained, and the effect of key model-parameters on the optimal decisions are investigated through sensitivity analysis. It is observed that the supply chain gives better response when both the manufacturer and the retailer collect used products simultaneously, and the performance of the supply chain can be improved by instigating either green innovation or marketing effort or both.

Introduction

In the recent era, due to environmental degradation, natural resource shortage, fast improvement of society and globalization of economy, a large number of customers are focusing on environment-friendly (green) product even for paying higher price. The government is also implementing rules and regulations to diminish the negative effects of used products on the environment. The rising environmental awareness of the customers and more pressure from the government have forced many manufacturers (e.g. Xerox, Caterpillar, Boeing, Deere, and Pitney Bowes) to involve themselves in product remanufacturing. Besides lowering the manufacturing cost, remanufacturing of end-of-life products helps to reduce carbon emission and environment pollution. In fact, closed-loop supply chain (CLSC) management can be used to achieve competitive advantage and attain sustainable development (Savaskan and Van Wassenhove, 2006). Giuntini and Gaudette (2003) showed that remanufacturing an end-of-life product is 40–60% less expensive compared to manufacturing a brand-new product. To reduce carbon footprints, Coca-Cola has tied up with third party recycler, and Dell and Adidas have started greening their products through advanced technologies (Giri et al., 2018). In a CLSC, as the manufacturer employs environment-friendly technologies for green innovation and pollution reduction, the retailers should also encourage the customers for buying environment-friendly products by explaining their benefits, and setting up outstanding display platforms. Some retailers such as Tesco, Casino, etc. have begun to attach the carbon footprint label with the products to attract the customers. Due to these collective efforts of the manufacturer and the retailer, green vegetables and organic foods, energy star certified home appliances (Best Buy), green cars and buses (in India, Tata Motors launched environment-friendly bus named ‘Marcopolo’) etc. are gaining attractiveness among the customers, and green supply chain management (GSCM) has become a hot topic to the researchers. This article considers remanufacturing of used products in a closed-loop green supply chain using green innovation effort and marketing effort.

In CLSC, it is necessary for the manufacturer1 and the retailer to find a suitable reverse channel for the collection of used products from the end users. Many manufacturers have employed various effective approaches such as product design and reconstruction of the process of recycling, advertising services, and employees training courses etc., for collecting used products. Xerox produces waste-free products with advanced technologies in order to minimize the wastes. Their customer-friendly recycling programs help them to collect millions of cartridges for remanufacturing in each year. Hewlett-Packard (HP) has created an innovative partnership with the people of Haiti, who collect the used plastic bottles, to produce new HP ink cartridges (http://www8.hp.com/h20195/v2/GetPDF.aspx/c05507473.pdf). Canon India has tied up with Producer Responsibility Organization to collect the used e-waste such as end-of-life copiers, scanners, printers, ink cartridges, toner cartridges, camera batteries for recycling in an environment-friendly way (https://in.canon/en/consumer/web/company-qehs-recycling). Kodak is making contracts with a large number of retailers (Savaskan et al., 2004), while Dell is making agreement with third parties to collect used products. Savaskan et al. (2004) investigated different problems which may arise during collection of used products. In addition, some governments request the manufacturers to collect used products and the manufacturers also encourage the customers to return their used products through exchange offer. This article considers three types of used products collection strategies, namely manufacturer collects used products, retailer collects used products and both manufacturer and retailer collect used products.

Green innovation effort of the manufacturer and marketing effort of the retailer are very essential to increase the market share and profitability. Weng et al. (2015) studied several literatures and presented green innovation as the hardware or software related technical improvements, new or modified process, practices, and organizational innovation that can benefit environment through sustainable development. For green innovation, the manufacturer can install advanced technology during manufacturing and remanufacturing, review the product periodically, improve the warranty policy and return policy, while the retailer can inspire the customers by advertising the product’s features, increasing number of service centers, increasing brand reputation, appointing well-trained sales personnel to guide consumer and giving attractive offers for marketing effort. Ma et al. (2013) considered quality improvement and marketing effort dependent demand and showed that if the manufacturer does not promise to give effort in quality improvement then the retailer also does not give more effort in marketing. Giri and Sharma (2014) explored that advertising is a vital factor in attracting customers and increasing market demand. Since such effort carries an extra cost, it is very important task for both the manufacturer and the retailer to set worthy price of the product. The present study considers green innovation effort and marketing effort simultaneously to find the optimal strategies and profitability of the supply chain members.

This paper treats the problem with a manufacturer-retailer Stackelberg game. The manufacturer as a Stackelberg leader divides his selling season in two periods and at the beginning of the first period announces the respective decisions for both the periods. We consider three models based on the manufacturer’s collection options of used products, namely, manufacturer collects the used products, retailer collects used products, and both manufacturer and retailer collect used products. During calculation we use backward induction. So, after knowing the decisions of the manufacturer, the retailer first optimizes her decisions for both periods and then the manufacturer optimizes his decisions. To investigate the effect of green innovation effort and marketing effort, we consider three special cases. The main purpose of our research is to find out the answers to the following questions:

  • Which one of the three models gives the best possible outcomes of the CLSC?

  • What are the effects of green-innovation investment cost and marketing cost on the optimal decisions?

  • How do the green innovation effort and marketing effort affect the optimal decisions and profitability of the supply chain members?

  • What are the impacts of the cost sharing contract on the key decisions and profitability of the supply chain players and the whole system?

  • How do different collection options of used products affect consumer surplus?

The rest of the article is organized as follows: In the next section, the relevant literatures are reviewed briefly. Section 3 deals with the required notations and assumptions. The four proposed models are formulated in Section 4. Comparison and analysis of the optimal results are described in Section 5 which contains cost sharing contract and three special cases. Numerical analysis is presented in Section 6. The sensitivity of some key-parameters is examined in Section 7. Section 8 concludes the paper with some managerial insights and future research directions.

Section snippets

Literature review

In this section, the related literature are reviewed across three research domains - CLSC with different collection options, greening and marketing efforts in supply chain, and two-period supply chain models.

Notations and assumptions

The following notations are used to develop the proposed model:

wiunit wholesale price of the manufacturer for ith period (i=1,2).
piunit selling price of the retailer for ith period (i=1,2).
eiunit marketing effort level of the retailer for ith period (i=1,2).
θilevel of green innovation for ith period (i=1,2).
Didemand function of the retailer for ith period (i=1,2).
Drreturn quantity.
cmunit manufacturing cost of the finished product from the fresh raw material.
cr(<cm)unit manufacturing cost of

Model formulation

In this section, a centralized model and three decentralized models with different collection options will be considered. The manufacturer divides his selling season into two successive periods while selling the product. During the first period, the manufacturer produces the green product with greening level θ1 at a manufacturing cost cm per unit and sells it to the retailer at a wholesale price w1 per unit. The retailer then sells it to the customers at a price p1 per unit with marketing

Comparison of the optimal results

In this subsection, we make a comparison of the optimal results of the proposed models analytically. Proposition 5 presents a comparison of the optimal collection rate of used products, greening levels, and marketing efforts of the proposed decentralized models.

Proposition 5

At the equilibrium, the collection rate of used products, the greening levels and the marketing efforts in the first period have the following relationships:

  • (i)

    τ1MRτ1M, when Hα12λ1G1δ(BA1)(1ε2)[2C1ε(BA1)]Ψ1ε2;τ2MRτ2R, when Hα12λ1G1δ(

Numerical analysis

In this section, we consider a numerical example and analyze the optimal results of different models proposed. As it is difficult to get access to the actual industry data, we consider the following parameter-values which agree with the assumptions of our study: d1=80;d2=70;α1=0.23;α2=0.22;β1=0.8;β2=0.65;γ1=0.78;γ2=0.63;cm=70;cr=35;A1=20;B=25;λ1=10;λ2=6;G1=12;G2=8;H=1200;δ=0.8;μ=0.35;wR=100;ε=0.2; in appropriate units.

Table 5 presents the optimal results of the proposed models under

Sensitivity analysis

In this section, we investigate the effect of key model-parameters on the optimal results in the first period. We examine the impact of one parameter at a time on the optimal results by keeping all other parameter-values unchanged. Fig. 2, Fig. 3, Fig. 4 represent the sensitivity of the parameters δ,H, and γ1 and G1.

From Fig. 2 we can draw the following observations:

  • As the common discount factor δ in the second period increases, the wholesale price decreases and the rate of decrease is faster

Managerial insights and conclusions

This paper investigates the optimal pricing and greening strategies, marketing effort, collection rate of used products, and profitability of CLSC members under a two-period model. We consider a centralized and three decentralized models depending on the manufacturer’s different collection options of used products. The manufacturer and the retailer can increase the market demand by improving greening level and increasing marketing effort, respectively. In this paper, the Stackelberg game

CRediT authorship contribution statement

Chirantan Mondal: Conceptualization, Methodology, Formal analysis, Writing - original draft, Writing - review & editing. Bibhas C. Giri: Supervision, Validation, Writing - review & editing, Investigation.

Declaration of competing interest

The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.

Acknowledgments

The authors are sincerely thankful to the anonymous reviewers for their helpful comments and suggestions on the earlier version of the manuscript. The funding was provided by University Grants Commission (F.No. 16–9(June 2017)/2018(NET/CSIR)) and Council of Scientific and Industrial Research (Grant Number 25(0282)/18/EMR-II).

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