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

This paper analyzes a two-product system with joint manufacturing and remanufacturing. In such a system the end-product stock contains both manufactured and remanufactured products, while the remanufacturable stock may contain products of different quality. Due to its complex structure, the valuation of inventories at the various stocking points is ambiguous. For two cases regarding quality differentiation we determine holding cost rates such that the outcomes of a net present value approach and an average cost approach are approximately equivalent. We show how the correct holding cost rates deviate from traditional valuation methodology and demonstrate its impact on operational performance. (c) 2007 Elsevier B.V. All rights reserved.