Determining assortments of used products for B2B transactions in reverse supply chain

The reverse supply chain–in which used products are collected from end-users and remanufactured for resale–includes a consolidator, broker, and remanufacturer. The used products entering the reverse supply chain tend to be of heterogeneous quality levels and require different amounts of remanufacturing effort and cost. The consolidator collects these products from the end-users and sells them in unsorted form to the broker; the broker sorts them into different grades and offers the graded units to the remanufacturer. This article analyzes the business-to-business transaction between the broker and the remanufacturer. We determine the broker’s optimal assortment in terms of the optimal number of grades, their expected remanufacturing costs, and selling prices. We show that: (i) the optimal grades created by the broker and their prices depend on the distribution of the remanufacturing costs for the used products acquired by the broker and the remanufacturer’s demand distribution; and (ii) the expected remanufacturing costs and selling prices for each grade follow a specific ordering and constitute a convex hull. Comparative statics analyses show the malleability of the grading process to the changes in the broker’s exogenous parameters. A numerical study using data from prior research on reverse channels shows that the optimal grading policy results in higher profits for both the broker and the remanufacturer as compared with a heuristic policy for creating grades.