European Journal of Operational Research 247 (2015) 804–819 Contents lists available at ScienceDirect European Journal of Operational Research journal homepage: www.elsevier.com/locate/ejor Production, Manufacturing and Logistics Supply chain design for unlocking the value of remanufacturing under uncertainty Wenyi Chen a , Beste Kucukyazici a , Vedat Verter a,∗ , María Jesús Sáenz b a Desautels Faculty of Management, McGill University, Canada b MIT-Zaragoza International Logistics Program, Zaragoza Logistics Center, Spain article info Article history: Received 14 October 2014 Accepted 25 June 2015 Available online 6 July 2015 Keywords: Uncertainty Product recovery Closed-loop supply chains Remanufacturing WEEE abstract Owing to the technological innovations and the changing consumer perceptions, remanufacturing has gained vast economic potential in the past decade. Nevertheless, major OEMs, in a variety of sectors, remain reluctant about establishing their own remanufacturing capability and use recycling as a means to satisfy the extended producer responsibility. Their main concerns seem to be the potential for the cannibalization of their pri- mary market by remanufactured products and the uncertainty in the return stream in terms of its volume and quality. This paper aims at assisting OEMs in the development of their remanufacturing strategy, with an outlook of pursuing the opportunities presented by the inherent uncertainties. We present a two-stage stochastic closed-loop supply chain design model that incorporates the uncertainties in the market size, the return volume as well as the quality of the returns. The proposed framework also explicitly represents the difference in customer valuations of the new and the remanufactured products. The arising stochastic mixed- integer quadratic program is not amenable to solution via commercial software. Therefore, we develop a so- lution procedure by integrating sample average approximation with the integer L-shaped method. In order to gather solid managerial insights, we present a case study based on BSH, a leading producer of home appli- ances headquartered in Germany. Our analysis reveals that, while the reverse network configuration is rather robust, the extent of the firm’s involvement in remanufacturing is quite sensitive to the costs associated with each product recovery option as well as the relative valuation of the remanufactured products by the cus- tomers. In the context of the BSH case, we find that among the sources of uncertainty, the market size has the most profound effect on the overall profitability, and it is desirable to build sufficient expansion flexibility in the forward network configuration. © 2015 Elsevier B.V. and Association of European Operational Research Societies (EURO) within the International Federation of Operational Research Societies (IFORS). All rights reserved. 1. Introduction Despite the increasing awareness concerning the benefits of re- covering the remaining economic value in the end-of-use and end-of- life products, recycling the material content of the returns continues to be a more prevalent form of product recovery. Remanufacturing the returned products so that they perform as good as their new ver- sions constitutes a higher form of recovery that is not used to the extent desired by the policy makers in many cases (Atasu, Van Wassenhove, & Sarvary, 2009). In Europe, for example, the Waste Electrical and Electronic Equipment (WEEE) Directive of 2002 has been widely criticized as a “recycling law”, and consequently its re- cast in 2012 aims at increasing the remanufacturing levels, among ∗ Corresponding author. Tel.: +1 514 398 4661. E-mail addresses: Wenyi.chen@mail.mcgill.ca (W. Chen), Beste.kucukyazici@ mcgill.ca (B. Kucukyazici), vedat.verter@mcgill.ca (V. Verter), mjsaenz@zlc.edu.es (M. Jesús Sáenz). other improvements. 1 The firm has an option of using the third-party or developing in-house capability for remanufacturing. The extent of OEMs’ voluntary involvement in remanufacturing, however, often de- pends on the economic benefits they expect directly (or indirectly) out of this activity (Guide, Teunter, & Wassenhove, 2003b). An im- portant factor that clouds the OEMs’ capability to assess the potential benefits of engaging in remanufacturing is the uncertainty in the vol- ume, quality and timing of the returns. Particularly, for the economic viability of in-house remanufacturing, which we study in this paper, the firm needs to ascertain that there would be sufficient volume of returns eligible for remanufacturing. In Section 6, we discuss one firm (BSH Bosch und Siemens Hausgeräte GmbH), which is currently in- vestigating the possibility of developing in-house remanufacturing capability for their commercial returns. Other examples of firms that 1 Available at http://ec.europa.eu/environment/waste/weee/index_en.htm. http://dx.doi.org/10.1016/j.ejor.2015.06.062 0377-2217/© 2015 Elsevier B.V. and Association of European Operational Research Societies (EURO) within the International Federation of Operational Research Societies (IFORS). All rights reserved.