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.

Holding Cost, Inventory Control, Net Present Value, Remanufacturing, Reverse Logistics
Business Administration and Business Economics; Marketing; Accounting (jel M), Production Management (jel M11), Transportation Systems (jel R4)
Erasmus Research Institute of Management
hdl.handle.net/1765/7095
ERIM Report Series Research in Management
ERIM report series research in management Erasmus Research Institute of Management
Erasmus Research Institute of Management

Corbacıoğlu, U, & van der Laan, E.A. (2005). Setting the holding cost rates in a multi-product system with remanufacturing (No. ERS-2005-072-LIS). ERIM report series research in management Erasmus Research Institute of Management. Erasmus Research Institute of Management. Retrieved from http://hdl.handle.net/1765/7095