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Remanufacturable Product Design and Contracts under Extended Producer Responsibility

Extended Producer Responsibility (EPR) legislation focuses on the life-cycle environmental performance of products. EPR has significant implications for management theory and practice. However, there is very little operations management research that examines the influence of EPR policy parameters on product design, the interactions among these parameters, and strategic managerial responses to combinations of parameters that constitute EPR instruments. We analytically establish optimal product design and pricing decisions by a manufacturer producing and selling a remanufacturable, durable product, in response to various implementations of EPR. We model a single manufacturer supplying a remanufacturable product to a single customer over multiple periods. The customer has a continuing need for the services of the product and optimizes between the costs of product replacement and the costs of operating the product. We model two environmental design attributes of the product that impact costs to both the manufacturer as well as the customer a one-dimensional “more is better” measure of environmental performance that captures the environmental impact of the product during use, and a measure of product remanufacturability that captures the environmental impact of the product post-use. From an environmental standpoint, we find that higher costs for environmental impacts induce environmentally favorable product designs. However, higher environmental costs result in lower firm profits. Coordinating contracts are known in the literature to lead to higher supply chain profits. We show that from an environmental standpoint as well, coordination in the supply chain is advantageous; design choices in the coordinated case are environmentally superior to those in the uncoordinated case. We present several contracts that can help achieve coordination in the supply chain, and we relate these contracts to installed base management, leasing, quantity discounts, and two-part tariffs. Thus, we demonstrate how the seemingly divergent objectives of environmental benevolence and profitability can be harmonized through coordination. (