Remanufacturing in Asia: location choice and outsourcing

Abstract

Purpose - Remanufacturing is a process whereby value from old products is recovered by replacing and recovering used components to bring such products to a new or like-new state. Today, both original equipment manufacturers (OEMs) and third parties are engaged in remanufacturing activities, investing in many locations throughout Asia. The purpose of this paper is to examine the reasons for initiating remanufacturing activities as well as the location determinants for the remanufacturing sector in Asia. Design/methodology/approach - The authors conduct a multiple case study. Triangulation is applied to gain objective views from interviewing three OEMs, one logistics firm, and three local small enterprises. Real options theory is the theoretical lens used to examine the location choice of the OEMs. Findings - Firms engaged in remanufacturing tend to co-locate facilities with existing manufacturing facilities, and those investing in new sites for remanufacturing view the regulatory environment as the most important factor. OEMs tend to leverage on existing manufacturing facilities or third-party remanufacturers to reduce their cost of commitment when starting remanufacturing at new locations. Research limitations/implications - The sample size is still small for the generalization of the results. Further empirical study is needed to test the propositions from this paper. Practical implications - This paper could assist managers and decision makers in the multinational corporations to design appropriate logistics-related solutions for remanufacturing in Asia. Originality/value - The authors work contributes to the theory on remanufacturing location determinants. It shows that OEMs and third-party remanufacturers can have a collaborative relationship instead of the commonly assumed competitive one, which is currently not found in the literature.

1. Introduction

Traditional supply chain management (SCM) is concerned with the flow of raw materials, components, and finished goods from source to the point of consumption ([21] Prahinski and Kocabasoglu, 2006). Today, the scope for SCM in the context of environmental sustainability has extended to include the reverse flow of unsold finished goods, parts, and packaging materials from the point of consumption back to the source or to the rework/refurbishing vendors ([22] Rogers and Tibben-Lembke, 2001). With greater environmental awareness, many firms have started to reduce waste, recycle, refurbish, and remanufacturing their products for a more sustainable future. Governments in many countries are starting to develop clearer and stricter environmental regulations on issues such as the disposal of chemical waste, cleaner production, use of landfills, and carbon emissions. For example, firms in Europe are expected to "take-back" environmentally hazardous products and packaging for recycling or reuse ([15] Kumar and Putnam, 2008).

One key aspect of reverse logistics that is drawing much attention is in the area of product remanufacturing. Product remanufacturing is the process whereby value from old products is recovered by replacing and recovering used components to bring such products to a new or near-new state ([17] Lund, 1983). To this end, a remanufactured product is reprocessed or upgraded in an industrial process. During this process, the core (used product or component) has to pass through a number of remanufacturing operations, e.g. inspection, disassembly, part reprocessing, reassembly, and testing, to ensure that it meets the desired product standards ([19] Östlin et al. , 2009).

In remanufacturing, resources that have been used in the initial manufacturing of the product are reused as much as possible, thereby making remanufacturing advantageous and environmentally sustainable. The reused resources consist of the material in the product, energy, machine time, labour, and other costs that have been accumulated in the new production process ([3] Bras and McIntosh, 1999). It thus has benefits such as the extension of the total life of the product, reduction of cost to the customer or user, and environmental sustainability.

Compared to the mass-production of new products, remanufacturing has to face several additional challenges such as the volume and quality uncertainty of the returned goods ([9] Guide, 2000). Previously, most remanufacturing activities were done by small third parties ([9] Guide, 2000). Today, many original equipment manufacturers (OEMs) participate in remanufacturing activities due to the advancement of modern manufacturing technology and the growing concerns for environmental protection and social responsibility ([18] Martin et al. , 2010). Other players such as the third-party service providers (3PLs) and third-party remanufacturers are also active in these closed-loop supply chain activities.

While most remanufacturing activities have taken place historically in the USA and Europe, Asia possesses great potential for the future growth of remanufacturing. Asia has become the fastest growing continent, and multinational corporations (MNCs) are aware of the importance of Asia as a fast-growth consumer market, forming 25 per cent of global consumption. Given the significant increase in the volume of goods returned in Asia, many MNCs have started or are considering setting up remanufacturing activities in the region. To be clear, remanufacturing differs from the normal foreign direct investment (FDI) as additional factors such as the volume fluctuation of the returned cores and the customer reception to the remanufactured products must be considered.

There are several options for an MNC to consider before it begins remanufacturing activities in Asia. It can either choose a suitable location in Asia to start its remanufacturing activities, or outsource to capable local third-party remanufacturers. We thus initiate this multi-case study to examine the location determinants in the remanufacturing sector as well as the outsourcing decision. We take a business-economic approach by viewing the decision of remanufacturing as primarily a business decision, depending on the profitability of the activity. While technological feasibility for remanufacturing is a pre-condition, technical factors alone are insufficient for firms to remanufacture. The huge investment needed in some remanufacturing facilities could be risky due to the uncertainties in both supply and demand. We thus examine the issue from a manager's perspective and explore related factors based on management theory, in particular real options theory which examines strategic decisions under high uncertainty ([16] Luehrman, 1998). In all practicality, as developing countries are eager to attract FDI for economic development and growth, a grounded understanding of the location factors on remanufacturing location would be important for crafting the national development policies of many Asian countries. The study is thus timely for both industry and policy makers to better locate and promote remanufacturing in Asia.

The rest of this paper is organized as follows. The literature on remanufacturing is reviewed. We then discuss the research methodology. Some general results from the multi-case qualitative study are presented, followed by an in-depth analysis. We then discuss the findings of our study with a framework and three propositions, followed by the conclusions.

2. Literature review

In a typical supply chain for customers in Asia, an OEM, perhaps headquartered in Europe or the USA but with manufacturing facilities in Asia, would procure hundreds or even thousands of components from various suppliers as well as its own facilities elsewhere, manufacture some essential parts by itself, and assemble all these components and parts into a complete product. The finished goods are first transported to multiple distribution centres (DCs) in various countries, then to the retailers, and finally onto the customers. This supply chain thus includes suppliers, the OEM, DCs, retailers, and the end customers.

However, a complete supply chain does not end at the customer. Reverse supply chain design is important for both value creation and environment protection as more and more products are returned for various reasons ([10] Guide and Van Wassenhove, 2002). In a typical reverse supply chain as illustrated in Figure 1 [Figure omitted. See Article Image.], there are four routes to close the loop. Here, the term "end-of-life" is defined as the time when the product's functionality no longer satisfies the requirements of the original owner ([13] Jofre and Morioka, 2005).

The first route of reverse logistics is reuse, where a product is used by a second customer without prior repair operations and as originally designed. The product is still fully workable and moved back for re-selling as a new or a used product. The second route is repair, where the product is restored to a functional state without a change of the customer, often without going to the OEM. The third route is from the dealer or retailer to the OEM for refurbishment or remanufacturing. Refurbishment is the process of restoring components to a functional and/or satisfactory state conforming to the original specifications, using methods such as resurfacing, repainting, and so on. In the case of remanufacturing, the product is disassembled, with most parts recovered, restored, and then remanufactured. The fourth route, recycling, is the process of extracting raw materials and processing it to produce the same material or another useful albeit degraded material ([13] Jofre and Morioka, 2005).

Focusing on remanufacturing, [9] Guide (2000) reviewed the literature and surveyed the remanufacturers in the USA, and provided seven criteria for re-manufacturability:

(1)] product is a durable good;

(2)] product fails functionally;

(3)] product is standardized and parts are interchangeable;

(4)] remaining value-add is high;

(5)] cost to obtain the failed product is low compared to the remaining value-add;

(6)] product technology is stable; and

(7)] consumer is aware that remanufactured products are available.

Compared to a normal situation of mass production, production planning, and control activities in remanufacturing are characterized by uncertainty in the timing and quality of the returns, and uncertainty in the materials recovered, and the reverse logistics. A typical remanufacturing facility comprises three distinct sub-systems: disassembly, processing, and reassembly. Apart from the remanufacturing plants, [21] Prahinski and Kocabasoglu (2006) divided the reverse supply chain process into five sequential steps: product acquisition, reverse logistics, inspection and disposition, reconditioning, and distribution and sales.

[23] Thierry et al. (1995) is an early study on remanufacturing undertaken with three case studies to examine the success factors for remanufacturing in various industries. For example, CopyMagic, a copier manufacturer in Europe, successfully initiated remanufacturing in-house with a high percentage of lease contracts for its products. The company could predict the return flows of used products quite accurately. Another company, the automobile maker BMW, focused on the remanufacturing of high value components such as the engines and alternators. The remanufactured parts were sold with the same warranty at 50-70 per cent of the new product price.

Cannibalization is another concern in remanufacturing as the remanufactured products may compete with the new products of the company for market ([1] Atasu et al. , 2010). Some companies choose not to remanufacture due to this consideration. However, third parties (often the smaller manufacturing firms) may see the niche and take over the market share. Thus, OEMs need to weigh the choice between "self-making versus outsourcing" for remanufacturing activities. [18] Martin et al. (2010) have examined an OEM's decision to make or buy/outsource remanufacturing activities empirically under a transaction cost framework. Factors such as asset specificity, intellectual property content, and brand reputation are relevant. [7] Ferguson and Toktay (2006) modelled the feasibility of remanufacturing when the remanufactured products compete with new product sales. The model shows the OEM should choose either remanufacturing or a collection strategy (collection of used products but not remanufacturing) when facing potential third-party competitors. The collection cost, unit manufacturing cost, and the relative willingness-to-pay will affect the OEM's choice between remanufacturing and the collection strategy.

From an OEM's perspective, investing in another country is a strategic decision. On FDI location, several theories have been proposed to understand the determinants of location and the entry mode of international business enterprises. [5] Dunning (1988) suggests that cross-border international activities are influenced by three sets of factors: host country specific factors, ownership specific factors (e.g. contractual risk), and internalization factors (ability to produce differentiated products), where location factors (host country specific) include market size, country risk, and location familiarity. Empirically, various factors such as cost, market size, culture, and technology have been considered in FDI location studies (e.g. [24] Tong and Walter, 1980; [2] Barkema et al. , 1996; [4] Chung and Alcacer, 2002).

One important perspective on FDI is real options theory which suggests that a firm may view its investment as a type of real options to hedge against potential risks beyond its control ([8] Folta, 1998; [16] Luehrman, 1998). If the venture turns out to be successful, it may increase the commitment; if not, it can terminate it without much cost. Joint ventures can be seen as a type of real options in FDI ([14] Kogut, 1991). In general, real options theory is a powerful approach to examining strategic decisions under high external uncertainty due to either environmental turbulence or technological newness ([25] Van de Vrande et al. , 2009). As these uncertainties largely resolve over time, real options theory predicts that firms would keep their options open when the external costs are high. For example, applying the approach to the mode selection of investments, an alliance can be seen as an option for the investing firm to defer internal development or acquisition of the targeted firm (e.g. [8] Folta, 1998; [11] Hagedoorn and Duysters, 2002). By deferring the full commitment, a firm can limit its exposure to a technology which may turn out to have little value. At the same time, alliances, particularly equity collaborations, provide a means to capitalize on growth opportunities and potential benefits ([8] Folta, 1998).

However, there is no known study on FDI from a remanufacturing perspective. Given the peculiar characteristics of remanufacturing, it is interesting to examine the location-related factors, which are valuable both in theory and in practice.

3. Research methodology

As research on remanufacturing in Asia is scant, we adopt a qualitative approach. A multi-case study is conducted to better understand remanufacturing in Asia for the development of a grounded theoretical framework. We mainly rely on semi-structured interviews for first-hand information from the manager-level professionals. This allows the respondents the freedom to share their experience and opinions, but at the same time provides the focus and scopes the discussion. To obtain the views and perspectives from multiple sources, we conduct interviews not only with the OEM managers but their partners and competitors as well, which is referred to as triangulation in case study research ([26] Yin, 2009). Each interview lasts 45-60 minutes and the research questions are focused on both the internal and external factors affecting the remanufacturing locations and operations in Asia.

We follow a theoretical sampling approach across multiple industries for two reasons ([6] Eisenhardt, 1989; [20] Pagell and Wu, 2009). First, our findings would be generalizable to a wide range of organizations. Second, it may increase the potential sample size, as very few firms are actively involved in remanufacturing operations. We used various industrial events held in a certain Asian Country Z on sustainability and remanufacturing to approach the potential target companies, which already have or are considering remanufacturing. Our initial search covers both manufacturing firms and 3PLs, both MNCs and the small- and medium-sized enterprises (SMEs). To expand our coverage of the players in the field, we also employ snowball sampling by asking the respondent companies to recommend other firms they know that have or are considering remanufacturing ([12] Heckathorn, 2011). Our desktop scan suggested that there are no more than 20 firms in Country Z with remanufacturing operations or are seriously pondering over remanufacturing. Finally, six firms are willing to participate in the study with a response rate of 30 per cent, three OEMs, and three SMEs as third-party remanufacturers. In addition, one 3PL who has experience in serving firms with remanufacturing operations opts to join the study. While the 3PL itself is not a remanufacturer, its observation of the remanufacturing practices of its clients has contributed to our study significantly. We thus add the interview information into this paper also.

It is interesting to note that while these respondents joined the study independently without the referral of the other participants, they are however connected in some way. The three SMEs are all suppliers to one MNC, and the 3PL is a regular service provider for two MNCs. This perhaps highlights the "smallness" of the remanufacturing circle in Country Z. Such connections grant us the opportunity to explore the interactions among the various players in the remanufacturing ecosystem, thus paving the way for triangulation to embellish our case study ([26] Yin, 2009). In general, the OEMs are often at the centre of the remanufacturing supply chain with great power in the remanufacturing ecosystem, while the SMEs are normally peripheral players dependent on business from the OEMs. However, the existence of such SMEs is important to the vibrancy of the ecosystem. These SMEs face additional challenges in remanufacturing operations since their businesses are affected by the strategic decisions of the OEMs (outsourcing or in-house production). Including both OEMs and SMEs in the investigation adds value to the remanufacturing literature with multiple perspectives.

In all, we conducted interviews with seven companies with operations in Country Z in late 2011 and early 2012. Besides the face-to-face interviews, secondary information from company archives is examined to supplement the study. The details of the interview participants are presented in Table I [Figure omitted. See Article Image.].

Among the three OEMs, Company A produces printers and cartridges, and is contemplating its entry into remanufacturing. Company B is a heavy equipment manufacturer with an established presence in the remanufacturing sector. Company C produces high-end servers in the electronics industry and initiated remanufacturing recently. The three OEMs are independent of each other.

Among the non-OEM participants of the study, Company D is a 3PL with a global presence, and serves many OEMs globally with an excellent knowledge of remanufacturing practices across various industries. Companies E, F, and G, which specialize in a few niche engineering processes such as laser cladding and vibratory finishing, are three local SMEs based in Country Z. While their main businesses are something else, they maintain a niche in the remanufacturing ecosystem with specific components or processes and could be suppliers for major remanufacturers including the OEMs.

4. Research findings

4.1 Reasons for remanufacturing

Before examining the location choice for remanufacturing, we first look at the reasons for firms to engage in remanufacturing in Asia. Company A decided not to embark on remanufacturing due to four reasons, the primary one of which is quality:

First, it is the regulatory concern. In many countries such as India and China, remanufactured goods are not accepted. Legally it is not allowed either to put remanufactured parts into a new product or to replace a remanufactured spare part when servicing a new product under warranty. Second, it is the brand issue. We are serious about our brand image. Even if we put another brand on our remanufactured products, people will still say that these are our products. As we can't be assured of the quality of remanufactured product, we can't provide warranty and the product will be our liability rather than an asset. Third, it is the cost. The cost of product remanufacturing is almost the same as making a new one and it is economically not viable to remanufacture. The salvage cost for the used parts is too high. Fourth, it is the low customer demand, as we don't see customer demand for remanufactured products, especially in large markets like India and China. We have done internal studies on the issue, and the conclusion is always the same. The central issues are quality, brand, cost, and demand. We just don't know how to control the quality of the remanufactured products and how to be sure that it can last.

We note that Company A touches on the issues mentioned in [9] Guide (2000) such as interchangeable parts (though technically feasible but legally prohibited), high remaining value-added (uncertainty on the quality of the returned cores as well as the high remanufacturing costs), and consumer perception. As three of the seven criteria are not met, it is logical for Company A not to initiate remanufacturing.

In contrast, Company B is quite successful in remanufacturing. Some of its operations in Asia are fully dedicated to remanufacturing:

We see the need for remanufacturing and its market potential. We can help our dealers by offering better products to them. It is rooted in our culture to treasure the close relationships with our independent dealers (they are allowed to sell other products but not competitors' products). As the dealers are close to our end customers and are in charge of servicing, remanufacturing gives them an option to improve their performance. Normally after a product reaches the 2nd or 3rd round of repair, the repair cost would be too high for a dealer. Now they can choose to send the product back to us for remanufacturing, and get a remanufactured product at half the price of a new product. At the operations level, we sell remanufactured products with the same warranty, performance specification, expected life, and price. But dealers who return old products to us and meet the minimal specification requirement can get a 50% credit, meaning that they can buy the remanufactured product at half price. Dealers know our specification requirements well and 98% of the returned used products can get the full 50% credit.

In the case of Company B, the remanufactured products are sold under the same warranty and quality. Two of the seven criteria in [9] Guide (2000) are mentioned here, namely, high remaining value-added and consumer awareness. Its products also satisfy the other five criteria. Technological progress has improved the appeal of remanufacturing in the case of Company B, as some remanufactured products are better than the new products made a few years earlier with the employment of more advanced technologies. The unique dealership system that Company B has developed throughout its long history becomes a strong support for its remanufacturing as dealers can certify the quality of the returned cores and bear the logistics costs as well. In return, the dealers are given a significant discount for the remanufactured products with the same warranty and quality.

Different from Company B selling to the same customers with the same functionality, Company C targets its remanufactured products to another set of customers due to the quality differences:

Our remanufactured high-end servers are mainly sent to developing countries due to their price advantages. There are two types of remanufactured products, those refurbished with warranty and those without warranty. Nevertheless, all remanufactured products are tested and assembled similar to the new ones. We started remanufacturing when there was sufficient demand (target customers are willing to buy) and supply (returns of used products) for the business. We don't see the competition between new and remanufactured products as they belong to different generations with different functionalities. There is a market for servers running on older technology and customers who value a lower price tag in the developing markets.

In the case of Company C, remanufactured products are deemed less advanced due to technological progress, and thus they are targeted at a set of more price-conscious customers. While the seven criteria in [9] Guide (2000) are still largely valid, the technology change in this case makes remanufactured products less competitive with lower performance requirements and expectations.

Based on his experience with the high-tech OEMs in various industries, a senior manager in Company D summarized his observation on the feasibility of remanufacturing as follows:

In my opinion, remanufacturing is good business if the production or sales of the product satisfies one of the following three conditions:

a. The product is leased (e.g. heavy equipment or high-end photocopiers). When the lease expires, the product is returned and refurbished for the next lease.

b. The sale model contains trade-ins of the used products.

c. Product design is highly modular so that the defective parts can be easily replaced and the repaired products can function similar to the new products (more applicable to high-tech electronics products with significant commercial returns).

The remaining value in the returned products is the critical factor. You have to justify the cost of returning and remanufacturing the products. As a rule of thumb, the refurbishment cost ought to be less than one-third of the original manufacturing cost in order to make remanufacturing profitable. For example, a PC motherboard costs over $100, and the cost of refurbishment should be less than $30. Similarly, a recycled product cannot be refurbished more than 3 times before scrapping.

The first two conditions guarantee a sufficient volume of used products with a high remaining value, which is critical in remanufacturing. They are consistent with criteria 4 and 5 in [9] Guide (2000). The third one is consistent with criteria 3 and 4 in [9] Guide (2000). In our cases, Company B allows its dealers to return the used parts in exchange for the remanufactured products, and Company C started remanufacturing only after realizing a sufficient volume of the returned products. In contrast, while Company A's products satisfy condition 3 technically, legally it is not allowed to put the remanufactured parts into the products under warranty. Given the short life cycle of its products, remanufacturing is not promising for Company A under such a constraint.

The other critical factor mentioned here is the remanufacturing cost, which is not mentioned in the seven criteria in [9] Guide (2000). The rule of thumb of the one-third of the original manufacturing cost may apply to products made under mass production. However, for spare parts, the remanufacturing cost can be as high as the actual production cost of a new product, and it is still feasible due to the limited supply of the new spare parts. Company G, who mainly serves clients in the oil and gas industry, offered the following observation:

The strong demand for remanufactured parts is partly due to the difficulty in getting new parts. It is often not easy to locate inventories as spare parts in the oil industry are specialized and produced in very low volume. Though the remanufacturing cost is almost the same as the production cost of a new part, it is still economical to do so as this reduces the replacement lead-time. Sometimes, the user has no other option except to use a remanufactured part as the spare part is out of stock globally.

Different from the OEMs, third-party SMEs are not the original manufacturers of used products and the market demand for such products is the key factor attracting them into the industry. In summary, our study shows that technological feasibility is the basis for the decision to remanufacture, followed by other factors including customer acceptance, remanufacturing cost, and the supply of used products. It is more inclusive than the seven criteria in [9] Guide (2000).

4.2 Location for remanufacturing activities

On locating the remanufacturing facilities, a firm considers many factors. For Company B, the primary concern is government support (both regulatory environment and financial incentives), followed by logistics capability and then the quality of the labour force:

Many developing countries are not supportive of remanufacturing. They are very suspicious about importing used products from the other countries. They fear that they will become dumping grounds for industrial garbage. To export used parts to our facility in such a country for remanufacturing, we have to do the cleaning here, and all imports to the country must go through two rounds of inspection by Customs officers in the two countries, and the remanufacturing process is video recorded by the Customs to ensure that the imported item are not dumped but remanufactured. The perception of Country Z (the country where Company B invested without existing manufacturing facilities) on remanufacturing is very different. We get support from the government to set-up the remanufacturing facility in the form of both grants and tax incentives. Customs is very friendly to us for moving the used products in and out of the country.

For our customers in the region, Country Z is also an ideal location to process the used products. Besides it is well connected to all different sites in the region, it is also well linked to all our main manufacturing facilities globally, and so it is easy for us to send partially processed used products to other locations for further remanufacturing. We are also able to source for some spare parts locally for the remanufacturing process. The skilled labour force and R&D facility are additional advantages as the profitability of remanufacturing is largely dependent on technology and skilled labour. Most employees in our plant are high-skilled workers.

From the above explanation, another important location factor is the proximity to the original customers since they are the suppliers for remanufacturing. Since the products feasible for remanufacturing are often heavy in weight such as photocopiers and excavators, reducing the shipping cost of the cores is an important selection factor. Since Company B has many customers in Asia, it makes economic sense for the firm to start remanufacturing in Country Z rather than sending the used parts back to the USA, where its headquarters and most manufacturing facilities are located.

Another key factor in the remanufacturing location is the leverage of the existing manufacturing facilities. Company B is the only exception in the case study, which does not co-locate remanufacturing facilities with the existing manufacturing plants. For example, Company C located its remanufacturing operations in Country Z to be close to its existing manufacturing facility there. When the volume of used parts is low, using existing facilities makes economic sense. Companies E and G adopt a similar strategy.

In summary, the location factors for remanufacturing include leveraging on the existing manufacturing facilities, the logistics capability of the site, government incentives and the regulatory environment, proximity to original customers, and the labour force.

4.3 Feasibility of remanufacturing outsourcing

Another issue explored in this study is third-party outsourcing. Historically, third-party firms had been remanufacturing before the involvement of the OEMs ([9] Guide, 2000). With the greater participation of the OEMs in remanufacturing in recent years, the OEMs can choose to either compete against third parties or collaborate with them ([7] Ferguson and Toktay, 2006; [18] Martin et al. , 2010). From our interviews with the OEMs, those who have not initiated remanufacturing such as Company A are strongly against third-party remanufacturing, while firms with some remanufacturing experience are amenable to collaboration. For example, Company B has collaborated with third-party SMEs such as Company F and Company G as suppliers in its remanufacturing process. Further, when the volume of the used parts is low, OEMs prefer to outsource some processes to third parties to reduce capital investment. Quality-validated third parties can reduce the OEMs' capital investment in remanufacturing and offer them the flexibility of commitment later. Company G made the following comments on Company B:

The cladding process we are doing is a common process and most MNCs including Company B have the capability to do it. However, they may outsource it due to the demand uncertainty and we can thus share their risks in the case of a demand surge.

Company B made the following comments on its selection between self-making and third-party outsourcing:

For third-party remanufacturing, quality is key. Brand reputation is another factor when we consider outsourcing. Every third-party remanufacturer has to be validated by us for quality as well as the production process. Some used parts which can't meet our specification have to be destroyed even though they appear acceptable. The third-party remanufacturer has to be serious on production quality since our brand name will suffer if the remanufactured part is faulty.

In summary, the outsourcing of remanufacturing depends on the capability of the third parties, the scope of the potential capital commitment, and brand reputation. Table II [Figure omitted. See Article Image.] summarizes the responses of the companies on their remanufacturing strategies.

4.4 Research framework

Based on the field interviews, we develop a framework in Figure 2 [Figure omitted. See Article Image.] with the three groups of factors as determinants for a firm's remanufacturing strategies in a specific location. Factors in the first group determine whether the firm should initiate remanufacturing activities or not, while the second group of factors affects the location of the remanufacturing facilities, and the third one is for the firm to decide on whether to remanufacture on its own or outsource to capable third parties.

This framework is comprehensive compared to previous work. While the first group has been studied (e.g. [9] Guide, 2000; [19] Östlin et al. , 2009), our framework is more inclusive than the literature such as the seven criteria in [9] Guide (2000) and highlights the importance of the supply of the used cores. The second part is not found in previous remanufacturing studies. Compared to the general FDI location literature, this study identifies two specific factors for remanufacturing: the leverage on the existing facilities and the proximity to the original customers. On remanufacturing outsourcing, while the literature often emphasizes on the competition between the OEM and the third party (e.g. [7] Ferguson and Toktay, 2006; [18] Martin et al. , 2010), we have instead found evidence of collaboration between the two actors.

4.5 Propositions for future work

We now apply real options theory to remanufacturing strategy and develop three propositions for future empirical validation:

P1. Firms engaged in remanufacturing tend to co-locate facilities with existing manufacturing facilities.

Given the uncertainty in customer demand as well as the volume of the returned used products, firms are concerned about the profitability of the remanufacturing operations. Remanufacturing is a promising concept for firms to demonstrate social responsibility but its business viability is highly uncertain due to factors beyond the firm's control. According to real options theory, the optimal strategy firms should choose when facing high external uncertainty is to invest a small amount first but keep the option for more commitment in the future open. As leveraging on existing facilities can significantly reduce the setup cost and allow for economies of scale from the existing operations, it is thus a preferred strategy. Company C is one such example where the returned volumes have been high enough to initiate remanufacturing:

P2. The regulatory environment is a critical location factor especially when the firm locates remanufacturing facilities in a new site without existing manufacturing facilities.

When a firm chooses to locate its remanufacturing operation in a new location, it must have significant advantage over existing manufacturing sites due to the great uncertainty in remanufacturing. According to our framework, other location factors such as logistics capability, labour force, and proximity to the original customers are factors affecting the location of existing manufacturing facilities also. Thus, the regulatory factor is a critical differentiator to offset the disadvantage of the high setup costs. Company B is one such example as the firm chose Country Z over countries with existing manufacturing facilities for its regulatory advantages:

P3. Third-party remanufacturers are an important support for OEMs to start remanufacturing in new locations, especially when the OEMs initiate remanufacturing without the support of the existing manufacturing facilities.

As mentioned, an OEM faces much uncertainty when starting its remanufacturing operation in a new location. According to real options theory, the firm should make a small commitment at first and increase its commitment in the future if it turns out to be successful. Due to the complexity of the remanufacturing process, outsourcing is one approach to reduce the initial commitment of the OEM. Outsourcing some remanufacturing activities to third parties lends the OEM flexibility and lowers its setup cost for remanufacturing. Third-party remanufacturers in the new market are thus more likely to be collaborators rather than competitors as they can share the risk and reduce the OEM's cost of commitment. In our field study, Company B is one such example as the firm engaged multiple local SMEs. Even for low value-added processes such as cladding which it is capable of doing by itself, Company C outsourced to a third-party SME to reduce its investment in Country Z at the start.

These propositions are based on our research framework presented in Section 4.4, but they are now more concrete with theoretical support. Our propositions focus on the location of the remanufacturing facilities, and link the large body of international business literature on FDI location (e.g. [5] Dunning, 1988; [4] Chung and Alcacer, 2002), to the emerging field of remanufacturing. We specifically apply real options theory, a popular approach in strategic management (e.g. [14] Kogut, 1991; [16] Luehrman, 1998), to examine our research problem. In addition, the third proposition highlights the potential collaboration between the OEMs and third-party remanufacturers from the perspective of the remanufacturing ecosystem, and complements the existing literature such as [18] Martin et al. (2010) which tends to emphasize on the competition between the two actors.

5. Conclusion

Remanufacturing is a growing research topic given the increasing concern on the sustainability of modern-day production processes. Most existing work focuses on the practices of the OEMs in Europe and the USA. From an Asian angle where OEMs can face various challenges but also have more choices, our work contributes to the field with a fresh perspective. By conducting multiple case studies on both the OEMs and SMEs in a certain Asian country, we have obtained an in-depth understanding on the factors affecting remanufacturing operations. A comprehensive framework is developed to contain firm-, location-, and ownership-specific factors that are related to the firm remanufacturing strategies. Moreover, we have shown that OEMs tend to leverage on existing manufacturing facilities or third-party remanufacturers to reduce their cost of commitment when starting remanufacturing at new locations. Our study shows that OEMs and third-party remanufacturers can have collaborative relationships instead of the commonly assumed competitive stance.

There are several limitations to this work. First, our work is still exploratory given the small sample size in this study. Further empirical work is needed to validate the research framework as well as the three propositions with larger samples. Second, the small sample size limits our exploration on the OEM-third-party relationship. It would be interesting to have a larger sample of both OEMs and third-party remanufacturers. We could then investigate the differences between OEMs and third parties in remanufacturing practices and as well as their interactions in the remanufacturing ecosystem. While we assume OEMs are large firms with greater power in the ecosystem, it is important to validate such assumptions in reality. Our finding on the collaborative-instead-of-competitive relationship between the OEMs and third-party remanufacturers also warrants further investigation. Both empirical exploration and theoretical modelling are needed to understand the conditions for a collaborative relationship as well as the possible evolution of the relationship with the growth of remanufacturing operations.

Practice-wise, this paper enriches the understanding on the burgeoning remanufacturing sector in Asia with the growing market demands, and the factors which affect the location decision, outsourcing preferences, and remanufacturing strategies of OEMs. Industry must consider the potential of leveraging on existing facilities, the challenges of a restrictive regulatory environment in the region, and the capability of the pool of third-party remanufacturers when deciding on the location choice of their remanufacturing facilities. In addition, outsourcing some low-end remanufacturing operations to third-party remanufacturers could be a pragmatic cost-saving option for OEMs in this region. It can assist managers and decision makers in transnational enterprises to design appropriate logistics-related solutions for remanufacturing.

This paper is based on a paper presented at the 17th International Symposium on Logistics (www.isl21.net) held in July 2012 in Cape Town, South Africa.

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Appendix

About the authors

Dr Qing Lu is a Research Fellow in Supply Chain Management at The Logistics Institute - Asia Pacific (TLIAP), the collaboration between the National University of Singapore and Georgia Institute of Technology. He is experienced in logistics research, with special focus on the strategic level of supply chain management for both firms and governments such as logistics outsourcing, supply chain security, and governance. His research interests also include humanitarian logistics and remanufacturing. He obtained PhD in business strategy from NUS Business School. Dr Qing Lu is the corresponding author and can be contacted at: [email protected]

Professor Mark Goh is the Director for Industry Research at the TLIAP. He is also a faculty at the NUS Business School and the University of South Australia. He is currently on the editorial boards of the Journal of Supply Chain Management, Q3 Quarterly, Journal for Inventory Research , and Advances in Management Research , and has served as an associate editor for the Asia Pacific Journal of Operational Research . His current research interests focus on supply chain strategy, performance measurement, buyer-seller relationships, and reverse logistics. Professor Goh holds a PhD from the University of Adelaide.

Miti Garg is an Associate Faculty at the SIM University. She is actively involved in industry and academic research. Her current research interests are in the field of global supply chain management, reverse logistics, growth and innovation in logistics and supply chain management, green IT, and integration of multimodal transport networks. She graduated with MSc (management) by research from the NUS School of Business.

Dr Robert de Souza is the Executive Director and the Chief Executive of the TLIAP. He is a Professor at the Georgia Institute of Technology in USA and a Senior Fellow at the National University of Singapore. He has published extensively and is a sought after speaker and consultant. He is a chartered engineer and serves on multiple industry, government, and academic committees. He received his PhD, MSc, and BSc honours in the UK.

  

Illustration

Figure 1: Generic product life cycle and end-of-life strategies

  

Figure 2: Framework for decision on remanufacturing

  

Table I: Profile of responding companies

  

Table II: Responses from OEMs on remanufacturing activities