THE AUTOMOBILE FIRM'S PERSPECTIVE: CHALLENGES AND OPPORTUNITIES

This section gives an extensive overview of literature on the choices faced by the automobile firm in setting remanufacturing operations.

Challenges in Operations Management

A firm planning to transition to a hybrid closed-loop system faces challenges with respect to inventory management, yield management, quality assessment and competition from other firms. These challenges are important in maintaining the slow adoption of remanufacturing by firms as they have conventionally operation with a ‘linear’ model, hence setting a reverse logistics chain is both complex and costly in nature. The operations management literature is replete with works that study hybrid systems using analytical and simulation techniques and offer solutions in terms of decision frameworks and guidelines. The inapplicability to repair systems literature due the assumption of one-one correspondence between returns and demand is in contrast to hybrid systems where the decisions between push/pull and hybrid/simple systems depend majorly on coordination level between demands and return. Push strategy means the returned products are processed as soon as they arrive, so the production schedule is returns driven. Pull strategy means the returned products are put as farther in the schedule as possible, which means the production schedule depends on returns, demand and serviceable inventory position. The lack of information about returns pattern and quality introduces variability in the system (Guide & Van Wassenhove, 2009). Supply chain process variability has been found to be detrimental to financial performance (Germain et al., 2008). Firms should invest in data collection capabilities by placing ‘checkpoints’ in the forward supply chain that helps in returns distribution by considering average lifetime and usage patterns. Big data capabilities has been found to support value creation in supply chain through expansive use of data, accelerating innovation in the long term (Wang et al., 2016; Lee, 2018).

Panagiotidou et al. (2017) derive value of information under different returns quality patterns and found it to be significant. This serves as a substantive economic rationale for firms that have hybrid systems but haven’t invested in a quality assessment system for returned products. A dynamic quality assessment system can also help reduce system variance that stems from uncertain product quality. It also highlights a value-adding use of RFID data captured by many organizations. While setting up a reverse logistics chain, the firm has an option of either collecting returned products directly from consumers or route them through retailers. The latter has been shown to be an economical alternative (Hong et al., 2015). Table 6.1 summarizes the operational choices faced by firms while setting remanufacturing operations and associated literature. Adopting remanufacturing involves more than gearing the supply chain to handle returns. The firm needs to recognize people-related issues like incentive alignment that helps optimize the ‘new objective function’ (Kleindorfer et al., 2005). Since it is complicated to evaluate the capital tied in a product (Tang et al., 2004), bullwhip index can be used as a measure of hybrid system performance as system variance is one of the major concerns while adopting a hybrid approach (Dominguez et al., 2019). Operations management literature has borrowed extensively from information theory to compare different supply chain structures and strategies, which can be leveraged for evaluating reverse supply chains (Gravier & Kelly, 2012).

TABLE 6.1

Considerations in Setting Remanufacturing Operations

Considerations

Related Literature

Return pattern

Invest in data collection capabilities, statistical estimation (DeCroix & Zipkin. 2005)

Inventory policy

Pull reduces system variance (DeCroix & Zipkin. 2005)

Imperfect quality

Invest in quality assessment system (Panagiotidou et al., 2017)

Minimize inventory cost

Economic order quantity (Teunter, 2001)

Reverse logistics chain operation

Contract collection activity to retailer (Hong et al., 2015)

Source: Self sourced summary of literature on operational considerations for firms considering getting involved with remanufacturing of automotive and auto-parts.

The Firm-Remanufacturer Relationship

While designing efficient production facilities and inventory management systems is a problem of local interest to a firm, it tends to overlook the exogenous factors like legislations and competition that might affect decisions like whether to remanufacture, how much to remanufacture and how to effectively manage the reverse logistics chain. This is an important consideration as Xerox and Deere & Co. have faced challenges in this context but have managed to set up successful remanufacturing programs (Majumder & Groenevelt, 2001). Setting up a new remanufacturing facility or tuning existing processes to handle returned products requires significant effort that is done post a thorough economic analysis. But presence of local remanufacturers severely impacts the quantity of products returned to the original manufacturer’s facility, thereby disturbing the economic logic of remanufacturing. Webster & Mitra (2007) show that although presence of local remanufacturing units spurs remanufacturing activity but it is advisable for the OEM to purchase returns from the local units to maintain its competitive edge. While a number of options exist to cater to the supply chain, we recommend some state sponsored initiatives or public-private partnerships in certain areas that can help remanufacturing facilities and supply chains to become strong, locally rooted and independent.

In order to consolidate the supply chain and bring on board a skilled workforce as well as better design and quality control, we suggest, herewith, some measures that can potentially be incorporated into industry practices, through governance-practice linkages.

6.4.2.1 Setting up Remanufacturing Facilities Through Infrastructural Development

An Associated Chambers of Commerce and Industry of India (ASSOCHAM) remanufacturing seminar in 2009 concluded the key observation that OEMs should be allowed and incentivized to build remanufacturing facilities first, as they have the largest market shares in the Indian automobile market (Vasudevan et al. 2014). However, for fear of cannibalization, OEMs may not be keen on establishing their remanufacturing supply chains. In another study, Vasudevan et al. (2014) observe that out of the different reverse logistics mechanisms followed by companies such as HP. Xerox and Kodak in India, auto parts and automobile reverse logistics mostly happen through a third party, which consolidates parts from consumers and/or retailers and supplies them to remanufacturers (which maybe OEMs in some cases such as Volvo). We thus propose a twofold intervention through state agencies. For encouraging OEMs to invest in remanufacturing facilities, state governments may consider allocating lad for infrastructure development, that is close to OEM facilities in Special Economic Zones (SEZ) - such as the ELCOT SEZ in Chennai, which houses Mahindra’s ’Auto Ancillary SEZ. Several exporters send their parts to this SEZ, where Mahindra houses skilled staff and remanufacturing infrastructure for auto parts manufacturing and assembly. We propose a similar SEZ-based model, where import duties on certain necessary remanufacturing parts can be reduced in order to have a smooth reassembly process.

6.4.2.2 Involving and Integrating Unorganized Efforts in the Supply Chain

A number of third parties involved in the remanufacturing process are unorganized and scattered in informal setups, from which, sourcing and transportation costs have to be borne by the OEMs. Due to this reason, a number of spare parts also end up in landfills (Vasudevan et al., 2014). For this, we propose a productivity-based subsidy on transportation of recovered automotive parts/automobiles. We suggest that in exchange for housing energy efficient and quality-controlled remanufacturing facilities. the OEM company may claim rebate of road transportation taxes, conditional to their reported energy savings crossing a stringent minimum threshold in terms operation and productivity (this maybe defined through production efficiency or quality, durability and emissions of finished product). Thus by tying together transportation with the energy efficiency of remanufacturing processes, we hope to establish an ‘emissions trade-off’, where a fixed level of emissions is allowed within the entire collection-reassembly-remanufacturing process, and a respite is offered in one part of the cycle, in exchange for a calculated energy savings in another part, inspired by carbon credit systems.

6.4.2.3 Promoting Local Semi-Skilled Labour

One of the main barriers for successful remanufacturing effort on a large scale, which is identified in several studies is the lack of skilled labour (Vasudevan et al., 2014; Govindan et al., 2016; Chakraborty et al., 2019). The (re)skilling of labour, drivers of technological growth, is a primary project on which the National Skill Development Mission (NSDM) in the country bases itself. The NSDM offers public private partnerships (PPPs) to place and train semi-skilled and skilled labour from all geographic backgrounds (rural, semi-urban and urban). These PPPs are potential source of skilled labour as well as equal employment opportunities for the remanufacturing sector. We propose the exploration of the NSDM as a road to developing long-term employment opportunities and income security for the workforce that trains under the OEM’s facilities.

 
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