Guide and van Wassenhove (2000) classify the systems for obtaining used products from the end-users as market-driven or waste stream. The waste stream system relies on diverting discarded products from landfill by making producers responsible for the collection and recovery of their products. A market-driven system relies on financial incentives to motivate end-users to return their products to a firm specializing in the recovery of those products. In the waste stream system, firms passively accept all product returns from the waste stream. Unable to control the quality of returns, firms often consider the large volumes of returns a nuisance, and naturally tend to focus on the development of low-cost reverse logistics networks. In the European Union (EU) a number of recent legislative acts, known as 'producer responsibility laws', require manufacturers to assume responsibility for the end-of-life disposition of their products. Some legislative acts may require the end-user to return the used product to a collection system for re-use. The requirements for firms doing business in the EU are clear, and these regulations may act as entry barriers for firms not aware of the changes required for reverse logistics activities. The result of the product returns mandates and policies is a large, uncontrolled volume of used products flowing back in increasing volumes to the original equipment manufacturers. Firms are ill-prepared to cope with the complexity of product returns and end-of-life disposition, and are seeking ways to minimize their losses.
In a market-driven system, end-users are motivated to return end-of-life products by financial incentives, such as deposit systems, credit toward a new unit or cash paid for a specified level of quality. Firms are able to control the level of quality of returned products since acceptance of returns is conditioned by standards. Market-driven systems are common in the USA because of the profitability of remanufacturing (Guide 2000). Firms using a market-driven approach for product returns focus mainly on high-value industrial products. However, there are exceptions; the system for remanufacturing automotive parts has been well established since the 1920s. For instance, Hormozi (1997) reports that Henry Ford realized that valuable automotive components should not just be discarded, but should be rebuilt. So the Ford Motor Company authorized a few select dealerships to remanufacture replacement parts. Soon, Ford established a franchised network of reman-ufacturers, authorized to recover Ford components on a regional basis. That historical beginning was soon followed by other carmakers who realized that franchising a few remanufacturers was an efficient way to deliver replacement parts for their products. Automotive component remanufacturing is not confined to large firms, however. A number of small companies have been established to remanufacture components for car and truck maintenance needs.
A combination of the market-driven and waste stream approaches is also possible. Product returns may be mandated or encouraged by legislative acts, but firms may still encourage the returns of products in known condition by offering incentives. A firm using a pure waste stream approach or a pure market-driven approach will have facilities with different operational characteristics and managerial control problems resulting in extremely different views of re-use activities. The market-driven system views re-use as a profitable economic proposition. In the waste stream system, cost reduction is encouraged and the fundamental issue is to minimize the amount of money the firm spends on it. Past research has focused almost exclusively on the waste stream approach to re-use activities and it is logical that the modeling efforts are aimed at cost minimization.
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