Input Material Reduction Incentives vs. Scrap Recycling For Closed-Loop Supply Chains

42 Pages Posted: 27 Aug 2016 Last revised: 1 Feb 2022

See all articles by Tolga Aydinliyim

Tolga Aydinliyim

Zicklin School of Business, Baruch College, CUNY

Eren Cil

University of Oregon - Department of Decision Sciences

Nagesh Murthy

University of Oregon - Charles H. Lundquist School of Business

Date Written: January 30, 2022

Abstract

Motivated by interactions with a major player in the aerospace industry, we consider the relationship between a supplier of specialty material forgings and a buyer that manufactures airplane components by extensively machining down these forgings as per component design specifications. Due to high material removal costs, the buyer prefers these forgings to be as similar in geometry and size to the component as possible, i.e., near-net-shape. The supplier, by default, is unable to deliver such near-net-shape forgings as per technological constraints, but can utilize costly effort and/or invest in the required technologies to achieve such capabilities. By taking into account uncertainty regarding the correspondence between supplier's effort and resulting forging size, we assess the implications of two innovative approaches for improving supply chain performance: (i) Input material reduction incentives via contracting, and (ii) scrap material recycling. We characterize the optimal decisions with respect to final component geometry, costs of implementing the two approaches under consideration, and which party in the supply chain controls the strategic recycling decision. We find that the supply chain should utilize both approaches in a complementary way for components with complex geometry, yet deliberately limit recycling and eliminate contracting for components with simple geometry---a strategy the buyer always implements when controlling the recycling decision. Furthermore, we show these contracting and recycling strategies to be robust by considering linear, cost-sharing, and non-linear contract alternatives. Finally, we study supply chain inefficiencies that result from decentralizing the recycling and/or contracting decisions, and highlight whether cost-sharing and non-linear contracts can outperform linear contracts.

Keywords: Manufacturing technology, supply chain, recycling, input material reduction, contracting, coordination, agency theory

Suggested Citation

Aydinliyim, Tolga and Cil, Eren and Murthy, Nagesh N., Input Material Reduction Incentives vs. Scrap Recycling For Closed-Loop Supply Chains (January 30, 2022). Baruch College Zicklin School of Business Research Paper No. 2019-02-03, Available at SSRN: https://ssrn.com/abstract=2830154 or http://dx.doi.org/10.2139/ssrn.2830154

Tolga Aydinliyim (Contact Author)

Zicklin School of Business, Baruch College, CUNY ( email )

55 Lexington Ave
New York, NY 10010
United States

Eren Cil

University of Oregon - Department of Decision Sciences ( email )

Eugene, OR 97403
United States

Nagesh N. Murthy

University of Oregon - Charles H. Lundquist School of Business ( email )

1208 University of Oregon
Eugene, OR 97403-1208
United States

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