You are on page 1of 5

Three-tiered E-waste Recycling Supply Chains Based on Revenue Sharing

Zhiduan Xu, Xiaobin Xue


School of Management, Xiamen University, Xiamen Fujian 361005, China
zhiduanx@xmu.edu.cn
Abstract
Recently, managing E-waste has become an important
target for domestic and international material cycles from
the viewpoints of environmental preservation and resource
utilization efficiency. This paper concerns on the
coordination issue of a three-tiered E-waste recycling
supply chain with a recycling centre, a Product
Responsibility Provider (PRP) and an electronic product
manufacturer in a single period model. The revenue
sharing coordination can be constructed by the members
through negotiating an appropriate proportion of their
revenue. This paper also proves that the supply chain
could be fully coordinated with the revenue sharing
contract and the total profit of the channel can be
allocated with any proportion of revenue if the proportion
is in the certain interval.

1. Introduction
The accelerated pace of waste generation from used
electrical and electronic equipment is attracting more and
more global concern. Nowadays, the electronic companies
are being forced to bear more responsibility for their
products. For these electronic companies, the
responsibility is being extended to end-of-life
remanufacturing and recycling. Even though this change
could mean an increasing profitability and efficiency, for
many it is still seen as a challenge.
The Product Responsibility Provider (PRP) is a thirdparty take-back company which accesses the design
process of a new product introduced by an electronic
manufacturer. During the sale process of the product, the
manufacturer makes payment to its PRP for end-of-life
management. Many years later, when the product reaches
its end-of-life and should be collected, it is delivered to a
recycling centre that works in with the products PRP.
After disassembly and some disposal, the recycling centre
sells the e-waste to the PRP, the PRP sells the materials to
the manufacturer after classification and some processing
steps.
The recycling centre, the PRP and the manufacturer are
members of supply chain. If they are controlled
distinctively, it may lead to inefficient performance of the
system in some cases. The first reason is information

asymmetry. The second reason is double marginalization.


In such circumstance, contracts are effective means to
solve these problems. However, a considerable amount of
researches have been devoted to the explored how the
contracts work for the coordination of the supply chain in
literature, such as wholesale price contract [1], buy back
contract [2,3], revenue sharing contract [4], sales rebate
contract [5], quantity flexibility contract [6], quantitydiscount contract [7], and so on.
In addition, most of the literature studied coordination
in two-tier supply chain for simplicity, a supplier and a
retailer [8,9], but in reality, supply chain often contains
three-tiered or more [10]. Like A.J. Spicer and M.R.
Johnson [11] create a structure for an industry of thirdparty recyclers, the supply chain contains the recycler, the
PRP and the manufacturer. Based on the PRP model A.J.
Spicer created, the paper establishes a model of threetiered supply chain including a recycling centre, a PRP
and a manufacturer. Furthermore, it studies how to
coordinate the three-tiered recycling supply chain with
revenue sharing contract. In the end, the paper proves that
the three-tiered reverse supply chain could be fully
coordinated by revenue sharing contract.
The rest of the paper is organized as follows. Section 2
describes the basic settings of the model; Section 3
compares the profit of the whole channel is centralized
controlled and the members are decentralized controlled;
Section 4 studies how to coordinate the channel by
revenue sharing contract; and Section 5 concludes the
paper.

2. Basic Settings
In this part, it considers a three-tiered reverse supply
chain consisting of a recycling centre, a PRP and an
electronic manufacturer. All three members of the reverse
supply chain are risk neutral and assumed to pursue
expected profit maximization. See Figure 1 for the
diagram of the considered three-tiered PRP recycling
supply chain. The manufacturer sells electronic products
such as cell phones, a kind of short life cycle products,
with highly uncertain demand. The electronic products are
only sold in a period. As the lead time of the stuff and
materials are much longer than the selling seasons,
therefore, the manufacturer has no chance of placing a

978-1-4244-2972-1/08/$25.00 2008 IEEE

second order.

Figure 1. Diagram of the considered three-tiered


PRP recycling supply chain

The sequence of events is as follows:


1.The recycling centre collects the used electrical and
electronic waste from different e-waste sources, such as
the consumers government departments and etc., after
classification and some processing steps, the left valuable
products are transformed into components;
2.The manufacturer forecasts the demand, negotiates his
trade contract with the PRP and passes the order to the
latter;
3.The PRP negotiates another trade contract with the
recycling centre and places his order;
4.The recycling centre sells the components to the PRP,
after some disposals the components are transformed into
raw materials, then PRP sells raw materials to the
manufacturer;
5.When the selling season arrives, the manufacturer sells
the products at a fixed price to the market. Any unmet
demand incurs goodwill cost to the manufacturer;
6.During the off-season, the manufacturer sells the
residual products (including the left products after the
selling season and the products returned from the
consumers) to the PRP;
7.After sorting, the PRP sells some valuable products to
the countryside or other places ,whilst selling the rest to
the recycling centre. For simplicity, the paper assumes that
both the PRP and the recycling centre get different value
from the returned parts.
The revenue sharing contract is considered in this paper.
With the contract, the upstream charges w per unit
purchased plus the downstream gives the upstream a
percentage of his revenue.
The following are variables used in the model:
c: recycling centres collection cost of waste mobiles for
unit product
cR :recycling centres processing cost of unit components
cP :PRPs processing cost of unit materials
cM :manufacturers manufacturing cost of unit electronic
product
p: manufacturers fixed sales price of unit product
g: manufacturers goodwill cost for unit unmet demand
sP : salvage value of unit disposal product
sR : salvage value of unit waste product
s: salvage value of unit residual product and s = sP + sR
wR : transfer price of unit component offered by the
recycling centre

wP : transfer price of unit material offered by the PRP


bR: return price of unit waste product offered by the
recycling centre
bP: return price of unit disposal product offered by the
PRP
D: positive stochastic market demand
: mean of the market demand D
: standard deviation of the market demand D
F: differentiable cumulated distribution function of the
market demand D
f :probability distribution function of the market demand
More notations will be defined later when needed. In order
to avoid trivial cases, we assume:
sR < c
c + cR < wR

(1)

sR bR < wR
wP > wR + cP
sP + bR bP < wP < p cM

These inequalities ensure that each member makes


positive profit and the chain will not produce infinite
products. For convenience, let S(q) be expected sales,
min(q, D)
q

S ( q ) = ( q D ) = q (1 F ( q )) + xf ( x ) dx = q F ( x ) dx
0

Let I(q) be the expected left over inventory,


I ( q ) = ( q D ) + = q S ( q ) . Let L(q)be the lost sales
function, L(q) = ( D q)+ = S (q) .

3. Benchmarks
3.1. The Centralized Supply Chain
The supply chain performs best when all the members
are centralized controlled (scenario C).When the channel
decides to order QC units of products for sales, the total
profit of channel T is
C

(QC ) = piS (QC ) + siI (QC ) g iL(QC ) (c + c R + c P + cM )iQC


C

We can obtain the optimal order quantity of the supply


chain by using derivative,
p + g c cR cP cM
(2)
Q * = F 1 (
)
C

p + g s

Define R = p + g c c R c P c M

as the ideal

p + g s

critical ratio of the chain, then QC* = F 1 ( R ) . We obtain


the maximized expected profit of the supply chain is
at T ( Q * ) = ( p + g s ) i Q xf ( x ) d x g i , which is only

*
C

correlation with the order Q C* .

3.2. The Decentralized Supply Chain


Consider scenario D in which the member of the supply
chain are independent. Manufacturer maximizes his own

expected profits to decide the channel order QD units of


products for sales. Assume that the prices are negotiated
based on the members bargaining powers. So the profit of
the
manufacturer
in
scenario
D
is

M
D

(QD ) = piS(QD ) + bP iI (QD ) giL(QD ) (wP + cM )iQD

We can obtain the optimal manufacturer order as many as


p + g cR wP
(3)
)
Q * = F 1 (
D

p + g bP

which is also the final order quantity of the channel.


According to (1), (2) and (3), its easy to verify that
T
Q D* < Q C* and ( Q ) < ( Q ) where D denotes the
total channel profit in scenario D. This means that the
manufacturers order quantity in decentralized supply
chain is lower than the supply chains optimal quantity in
centralized supply chain, and the profits are also lower
than those in centralized supply chain. This is well-known
double marginalization. So the upstream members have
to provide incentive mechanism such as revenue sharing
contract to encourage the downstream to order more to
improve the performance of the channel.
T

*
D

*
C

4. Coordinating by Revenue Sharing Policy


4.1. The Revenue Sharing Policy
The revenue sharing contract is a coordination
mechanism offered by the upstream of the supply chain to
the downstream, which modifies the downstream profit
(and also the upstream itself), so that the downstream
decision is coherent with the supply chain total
optimization. Supply chain contract is described by the
parameters (w, ), where w is the price and is the
fraction of the downstream revenue the downstream keeps,
so (1-) is the fraction the upstream earns. Assume all
revenue is shared, so salvage revenue is also shared among
the members. Thus, the recycling centres, the PRPs and
the manufacturers expected profits can be expressed
respectively as follows:
(QRM ) = A i( piS(QRM ) + bP iI (QRM )) giL(QRM ) (cM + wA )iQRM (4)
RM

( Q RP ) = B i ((1 A ) i ( p i S ( Q RP ) + b P i I ( Q R P )) (5)
+ ( w A w B c P ) i Q RP ) ( b P s P b R ) i I ( Q RP )

RP

RR

(QRR ) = (1 B )((1 A )i ( p i S (QRR ) + b P i I (QRR ))

(6)

+ ( wA wB c P ) iQRR ) + ( wB c c R )iQRR (b R s R )i I (QRR )

Where

RM

RP

and

RR

denote the profit of the

manufacturers, PRPs and the recycling centres in


scenario R. The manufacturer and the PRP share the
revenue at proportionA and 1-A, while the PRP and the
recycling centre share the revenue at proportion B and
1-B. While the profits of the members are (4)-(6), the
optimal order quantities for these members are

A i p + g c M wA
(7)
)
A i p + g A ib P
(B A iB )i p + B i( wA c P wB )
*
QRP
= F 1 (
) (8)
(B A iB )i p ((B A iB )ib P bP + s P + bR )
(1 B )i(1 A )i p + ((1 B )i(wA wB cP ) + wB c c R ) (9)
Q* = F 1 (
)
*
QRM
= F 1 (

RR

(1 B )i(1 A )i p ((1 B )i(1 A )ibP bR + s R )

In order to achieve full coordination for the channel, the


members of the supply need to set the wholesale prices
*
*
*
,
and the revenue proportions to satisfy QRM
= QRP
= QRR
or

equivalently,

A i p + g c M wA
(B A iB )i p + B i( wA c P wB )
=
P
A i p + g A ib
(B A iB )i p ((B A iB )ib P b P + s P + b R )
=

(1 B )i(1 A )i p + ((1 B )i( wA wB c P ) + wB c c R )


=R
(1 B )i(1 A )i p ((1 B )i(1 A )ib P b R + s R )

(10)
And the goal to achieve full coordination is realized if the
contract prices and the proportions among the members of
*
the supply chain satisfy QRM
= QC , or equivalently,
A i p + g c M wA
p + g c cR cP cM
=
= R (11)
A i p + g A ib P
p+gs
The whole channel is fully coordinated as long as (10)
and (11) are satisfied. For simplicity, we denote
x1 = p + b P i R p i R
y1 = c M + g i R g
x 2 = x1 y 1 c P

(12)

y2 = b P iR s P iR b R iR
y3 = b R i R s R i R + c + c R

Comparing (10), (11) and (12), we can easily get


respectively:

y1 + w A
x1
y2
B =
x 2 wB

A =

(13)
(14)

That is to say, when (13) and (14) are both satisfied, the
full coordinated supply chain can be achieved. When the
PRP decides the price wA, then the fraction of the
manufacturers revenue the manufacturer keepsA should
be decided based on (13). And the wholesale price wB and
the fraction of the PRPs revenue the PRP keeps B
should be negotiated based on (14).
Define the expected sales quantity of the coordinated
system as
Q
(15)
0 x d F ,
=

F (Q )

Noting that

F ( Q * ) = F ( Q c* ) = R

, we can derive that

E (S (Q* ) +

Q*
+
R 1
R 1 Q* *
i I (Q* )) = xdF + * Q*dF +
i (Q x)dF
(16)
Q
0
R
R 0
Q*

1 Q*
xdF =
= i xdF = 0
0
R
F (Q)

Which indicates that combines the return quantity I(Q*)


with the sales quantity S(Q*). As S(Q*)+ I(Q*)= Q*, (16)
can also be written as
1
(17)
E (Q *
i I (Q * )) =
R

Define the sales price with the goodwill cost is:


i p i g i( ) .
(18)
= A

Denote
M = cM wA
(19)
= ( i )i p + (w w cP )
P

R = (1 B )i(1 A )i p + (1 B )i(wA wB cP ) + wB c cR
as the equivalent marginal sales revenue of the three
members of the chain. Based on (17), (18) and (19), the
expected profit of the three members are
ERM (Q* ) = E(A i( piS (Q* ) + bP iI (Q* )) g iL(Q* ) (cM + wA )iQ* )
= (A i p + g cM wA )i E(S (Q* ) +

(20)

= (A i p + g cM wA )i g i
= M i
ERP (Q* ) = E((B B iA )i piS (Q* ) + ((B B iA )ibP bP + s P + bR )i I (Q* )
= ((B B iA )i p + B (wA wB c P ))iE(S (Q* ) +

(21)

R 1
iI (Q* ))
R

= ((B B iA )i p + B (wA wB c P ))i


= P i
ERR (Q* ) = E((1B )i(1A )i piS(Q* ) + ((1B )i(1A )ibP bR + sR )iI (Q* )
+((1B )i(wA wB cP ) + wB c cR )iQ* )
= ((1B )i(1A )i p + (1B )i(wA wB cP ) + wB c cR )iE(S(Q* ) +

(22)

R 1
iI (Q* ))
R

= ((1B )i(1A )i p + (1B )i(wA wB cP ) + wB c cR )i


= R i

To obtain the members of the supply chains profit


ratio, assume three parameters M, P andR, where the
parameters are normalized to satisfyM +P +R=1 and
>0. Based on (20)-(22), we have
E
( Q * ) : E ( Q * ) : E ( Q * ) = M : P : R (23)
RM

RP

RR

So we have

= P = R
M
P
R

To illustrate the model and gain additional insight from


the analysis above, we assume demand is uniformly
distributed between (4000, 6000), so the =5000. Let
c=20, cR=5, wR =30, cP=2, wP =36, cM=9, p=50, g=20,
bP=30, sP=10, bR=18, sR=15 and s=25.
Using the above model we can get in the scenario C (the
centralized supply chain), R=0.7555556, QC* = 5511 and

T
C

T
D
R
D

(24)

The above analysis shows the expected profits of the


manufacturer, the PRP and the recycling centre. To
achieve the full coordination of the supply chain, the
prices and the revenue proportions should satisfy (13) and
(14). We also obtain the expression of the members profit
ratio of the supply chain.

( Q C* ) = 6 1 6 7 5 .1 1

decentralized

In

supply

= 61147.11 ,

M
D

the

scenario

chain),

(the

QD* = 5289

= 15621.54 , D = 20325.83 and


P

= 25199.74 ,where the

and

denote

the PRPs and the recycling centres profit. To realize the


coordination, we assume the members of the channel will
accept the contract if the expected profits under the
contract will be no less than which they are in scenario D.
T
P
P
So we can get M <
< , where
D

RM

denotes the total channel profit by using the revenue

R 1
iI (Q* )) g iE( D)
R

+B (wA wB c P )iQ* )

4.2. Numerical Illustration and Discussion

contract. According to this assumption, the expected profit


expression and (13), we can get thatA is in the interval
[0.609082, 0.61643] , and wA =x1A -y1 is in the interval
[17.13908, 17.39545]. Figure 2 shows the excepted
percentages of the members in the channel when B
=0.47. Table 1 and Figure 3 show the excepted profit
percentages of the PRP and the recycling centre whenA
=0.609082, where if the A is fixed, the percentage is
fixed too.
As Figure 2 shows, when the proportion of the revenue
between the PRP and the recycling centre is a fixed value
and the proportion of the revenue between the
manufacturer and the PRP is increasing in a given interval,
the percentage of the manufacturers profit in the channel
M is also increasing, whileP andR are decreasing.
As Table 1 and Figure 3 show, whenA =0.609082 and
B is increasing, the P is also increasing while the R is
decreasing. So the members of the supply chain should
negotiate appropriate A and B before they accept the
contract. In this case, we assume that each member of the
supply chain will accept the contract when they gain the
same more profit than in scenario D, so we can get the
values (A, B)=(0.611531,0.477052), while the values
wB)=(17.224526,25.61017527)
and
the
(wA,
(
,
,
) = (15797.54333,20501.82717,25375.74075) , all

RM

RP

RR

the expected profit are 176 more than that in scenario D.


Meanwhile, we will find although the prices the recycling
centre and the PRP sell to the downstream are less than the
cost, the revenue sharing contract can make all the three
members more profit than in decentralized decision, and

make the optimal order quantity and supply chains profit


equal to those in centralized supply chain.
The excepted percentages
0.45
0.4
0.35
0.3
M
P
R

0.25
0.2
0.15
0.1
0.05

0
0.6091
0.6098

0.6106

0.6113

0.6120

0.6128

0.6134

0.6142

0.6150

0.6157

0.6164

Figure 2. The excepted percentage of the members in


the channel(B =0.47)
Table 1.Excepted profit percentages of the PRP and
the recycling centre(A =0.609082)

P
0.329564
0.330432
0.331282
0.332141
0.333000
0.333859
0.334718
0.335577
0.336436
0.337295
0.338154

0.476800
0.469686
0.415772
0.473458
0.475334
0.477231
0.479117
0.481003
0.482889
0.484775
0.486661

References

Excepted percentage
0.45
0.4
0.35
0.3
0.25

P
R

0.2
0.15
0.1
0.05

0.468

Acknowledgment
This work was supported by the Ministry of Education
of the Peoples Republic of China 06JA630059.

0.417148
0.416289
0.415430
0.414571
0.413712
0.412853
0.411994
0.411134
0.410275
0.409416
0.408557

profit of the channel can be allocated with any proportion


of revenue if the proportion is in the certain interval.
Although the revenue sharing is a very attractive
contract, the coordination case may not cover revenue
sharings additional administrative expense because the
price is less than the cost, the upstream should have more
pressure on checking the profit of the downstream. The
revenue sharing contract may not be attractive if the
downstream actions exert an influence on demand and
there exists some other factors influencing the decision to
offer revenue sharing. More research works such as
considering the cooperation of different kinds of contracts
in complex supply chain will be carried on in the future.

0.47 0.472 0.473 0.475 0.477 0.479 0.481 0.483 0.485 0.487

Figure 3. Excepted profit percentages of the PRP and


the recycling centre (A =0.609082)

5. Conclusion
Designing an effective recycling system has significant
impact on the recycling centre, the PRP, the manufacturer
and the market. This paper constructed a three-tiered
coordination system by revenue sharing. We further
showed that if the recycling centre, the PRP and the
manufacture have a common standard (in the above case,
the standard is that they can gain more profit than in
decentralized decision), they can design an appropriate
contract. The three-tiered reverse supply chain can be fully
coordinated by the revenue sharing contract and the total

[1] Lariviere, M. and E. Porteus., Selling to the newsvendor:


an analysis of price-only contracts, Manufacturing and
Service Operations Management, vol. 3, pp. 293-305, 2001.
[2] Padmanabhan, V. and I. P. L. Png., Returns policies: make
money by making good, Sloan Management Review, pp.
65-72, Fall 1995.
[3] Padmanabhan, V., I. P. L. Png., Manufacturers returns
policy and retail competition, Marketing Science, vol. 16,
pp. 81-94, 1997.
[4] Cachon, G. and Lariviere, M., Supply chain coordination
with revenue sharing: strengths and limitations,
Management Science, vol. 51, pp. 3044, 2005.
[5] Taylor, T., Coordination under channel rebates with sales
effort, Stanford University working paper, 2000.
[6] Tsay, A., Quantity-flexibility contract and suppliercustomer incentives, Management Science, vol. 45, pp.
1339-58, 1999.
[7] Tomlin, B., Capacity investments in supply chain: sharingthe-gain rather than sharing the-pain, University of North
Carolina working paper, 2000.
[8] Pasternack, B., Optimal pricing and returns policies for
perishable commodities. Marketing Science, vol. 4, pp.
16676, 1985.
[9] Mantrala M. and Raman K., Demand uncertainty and
suppliers returns policies for a multi-store style-good
retailer, European Journal of Operational Research, vol.
115, pp. 27084, June 1999.
[10] Munson, C. and Rosenblatt, M., Coordinating a three-level
supply chain with quantity discounts, IIE Transactions,
vol. 33, pp.37184., 2001.
[11] Spicer, A.J. and Johnson, M.R., Third-party
demanufacturing as a solution for extended producer
responsibility, Journal of Cleaner Production, vol. 12, pp.
3745, February 2004.

You might also like