How to set the holding cost rates in average cost inventory models with reverse logistics?
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Among both inventory theorists and practitioners, it is common use to include an opportunity cost rate in the holding cost rate. In that way, the cost of capital can be roughly incorporated in an average cost (AC) inventory model. The traditional way for calculating the opportunity cost rate is to multiply the interest rate (or discount rate) by the marginal cost for producing/ordering an item. For single source inventory systems with only forward logistics, this method is easy to use, and leads to near-optimal policies from a discounted cash flow (DCF) point of view. For inventory systems with reverse logistics, however, the method is no longer straightforward. In this paper we compare different methods for calculating the opportunity cost rates of returned non-serviceable, remanufactured, and manufactured items. We discuss which method gives the best results for a specific reverse logistics model with setup costs, non-zero lead times, and disposal.