Setting the holding cost rates in a multi-product system with remanufacturing

The Net Present Value (NPV) approach is considered to be the right approach to study inventory and production systems. But, approximate average cost (AC) approach is widely used in both practice and theory. However, the opportunity cost interpretation of AC framework is not that straightforward in systems with joint manufacturing and remanufacturing. In such systems the end-product stock contains both manufactured and remanufactured products. Remanufacturing can be used to convert the returns stock into different products. Due to this complex structure, the valuation of inventories at both stocking points is ambiguous. In this paper we analyze a two-product system with manufacturing and remanufacturing in a deterministic setting. By considering two different models under an NPV approach and an AC approach, we determine holding cost rates such that the two approaches are approximately equivalent. Then we demonstrate the negative effect of traditional valuation methodology on the remanufacturing operation dynamics by using these theoretical results.