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Strategies for product recovery decisions
Article in International Journal of Product Lifecycle Management · February 2009

DOI: 10.1504/IJPLM.2009.031673
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186 Int. J. Product Lifecycle Management, Vol. 4, Nos. 1/2/3, 2009
Strategies for product recovery decisions
Ajith Kumar Parlikad* and

Duncan McFarlane
Department of Engineering,
Institute for Manufacturing,
Cambridge University,
17 Charles Babbage Road,
Cambridge CB3 0FS, UK
E-mail: aknp2@cam.ac.uk
E-mail: dcm@eng.cam.ac.uk
*Corresponding author
Abstract: Product recovery is beset by uncertainty regarding the quality of

end-of-life (EOL) products, and in order to ascertain the reusability of these
products, they have to undergo expensive tests. This undermines the
profitability of the recovery process. The key to improve the effectiveness of
product recovery is to improve the quality of information available before
testing. Emerging data capture technologies can significantly improve the
availability of information. However, in order to maximise the potential of
these technologies, appropriate decision-making algorithms that exploit such
information must be developed. We model the recovery process using a
decision-theoretic approach, and derive strategies to ascertain the reusability of
EOL products, and also to decide when tests are beneficial. We show that
improving the quality of information leads to increase in effectiveness of the
recovery process by reducing the need for tests.
Keywords: decision analysis; applied probability; uncertainty modelling;

product recovery.
Reference to this paper should be made as follows: Parlikad, A.K. and

McFarlane, D. (2009) ‘Strategies for product recovery decisions’, Int. J.
Product Lifecycle Management, Vol. 4, Nos. 1/2/3, pp.186–206.
Biographical notes: Ajith Kumar Parlikad is a Lecturer of Automation and

Control at the University of Cambridge. He received his PhD from Cambridge
University in the area of information value quantification in product recovery.
His current research focuses on decision support systems and information
quality in the context of asset management.
Duncan McFarlane is a Professor of Service Support Engineering at the

University of Cambridge. He is also a Director of the Distributed Information
and Automation Laboratory and Research Director of two industrially
supported activities: the Service and Support Engineering Programme and the
Airport Operations Programme. He has been involved in the design and
operation of automation and information system for the manufacturing supply
chain for 20 years.
Copyright © 2009 Inderscience Enterprises Ltd.

Strategies for product recovery decisions 187
1 Introduction
Recovering value from products discarded at the end of their useful life is becoming
increasingly important due to environmental regulations (Clean Japan Center, 1991;
European Commission, 2000; European Commission, 2003; Microelectronics and
Computer Technology Corporation, 1993), economic benefits (Koster et al., 2002; Toffel,
2004) and greater consumer ‘green awareness’ (Stock et al., 2002; Toffel, 2003). For
instance, Blumberg (2003) reviewed the market size for the product recovery industry
and found that it will become a major business opportunity for the 21st century.
However, the profitability of product recovery operations is hampered due to the high
level of uncertainty and the lack of information availability (Parlikad and McFarlane,
2007).
This paper has two key objectives:
1 To develop decision strategies that a product recovery organisation could follow to
choose the best recovery path for a returned product on the basis of available
information. In particular, we propose a methodology by which a recoverer can
select products that should undergo testing; and finally select the products that can be
reused.
2 To show that by improving the quality of readily available information associated
with end-of-life (EOL) products, the effectiveness of the product recovery process
can be improved by reducing the costs incurred in unnecessary testing of EOL
products.
The paper is structured as follows. In Section 2, we review relevant areas of the literature.
We also explain the product recovery process and identify the key decisions made during
this process. In Section 3, we present an approach to model product recovery decisions
using probability theory and decision theory. In Section 4, we use this approach to model
the product recovery process and show that improving ready availability of information
can increase the effectiveness of the product recovery process. Further, in Section 5, we
derive strategies for product recoverers to choose the products that need testing, and to
choose the best recovery option, and illustrate these strategies using a simple example.
Finally, we provide some concluding remarks on the paper in Section 6.
2 Background
2.1 Product recovery management

Product recovery management is defined as “the management of all used and discarded
products, components, and materials with an objective of recovering as much of the
economic (and ecological) value as reasonably possible, thereby reducing the ultimate
quantities of waste” (Thierry et al., 1995). Majority of the literature in product recovery
management is found under the umbrella of reverse logistics (Fleischmann et al., 1997;
Guide et al., 2000; Stock, 1998). The earliest attempts to consolidate industrial practices
and to develop a theory on product recovery are Goggin (1998) and Gungor and Gupta
(1999). Goggin and Browne (2000) illustrate typologies and models for product recovery
operations based on typologies of manufacturing chains. Fleischmann (2001) offers
188 A.K. Parlikad and D. McFarlane
insights on several aspects of reverse logistics including network design, inventory

management and production scheduling and develops quantitative models for optimising
each of these core operations. De Brito (2004) provides a complete framework for reverse
logistics theory. For the most recent comprehensive literature review on this subject, the
reader is referred to Srivastava (2007).
The importance of effective information sharing and management is an extensively
researched topic within the realm of supply chain and operations management (Lee et al.,
1997). Similar to forward supply chains, information plays an important role in effective
management of reverse supply chains and consequently on the product recovery
processes. However, there are some stark contrasts between forward and reverse supply
chains that make information management ever more critical in product recovery
management. The reader is referred to Fleischmann (2001) and Tibben-Lembke and
Rogers (2002) for a detailed examination of the differences between forward and reverse
supply chains. The most critical factor among these is the level of uncertainty prevalent
in reverse supply chains. The high variety of products and uncertain product condition
after usage result in high levels of uncertainties when it comes to choosing the correct
recovery option (Guide et al., 1999; Toffel, 2004).
A number of papers in the product recovery management and reverse logistics
literature have illustrated the significance of product information availability to alleviate
these uncertainties (de Brito and van der Laan, 2002; Ferguson and Browne, 2001;
Galbreth and Blackburn, 2006; Guide et al., 2005; Klausner et al., 1998; Scheidt and
Zong, 1994; Spath et al., 1996; Thomas et al., 1999; Zikopoulos and Tagaras, 2007).
Ferguson and Browne (2001) classify the information required for making these
decisions effectively into the following six categories:
1 product related information, which is the information associated with the
composition of the products
2 location related information, which relates to the specific location and quantity of
the product
3 utilisation related information, which relates to the use of the product over its usage
life
4 legislative information, which relates to legislative requirements, if any, that are
placed on the discarded product
5 market information, which relates to the information about the market conditions
where the returned product might potentially find customers
6 process information, which pertains to the knowledge regarding the recovery process
itself, for example, resource availability, schedules.
Classification of product information into static, dynamic and external classes has been
proposed by Klausner et al. (1998) and Parlikad and McFarlane (2007), and is important
when modelling and building information systems to manage product information
throughout the lifecycle. In addition, Parlikad and McFarlane (2007) also illustrate the
lack of availability of information during product recovery. We capture the essence of
this in Section 2.2 to provide a good context for the rest of this paper.
2.2 Product recovery operations and decisions

Thierry et al. (1995) outline the different options available for recovering value from
EOL products. These are classified by Fleischmann et al. (1997) broadly into:
1 reuse, which also includes refurbishment and remanufacturing, as well as reuse of
components through cannibalisation
2 recycling, the purpose of which is to reuse materials from used products and parts by
various separation processes.
Krikke et al. (1998) observe that while selecting the best option, the decision-maker has
to take into account its technical, economic and ecological feasibility. Technical
feasibility reflects the technical possibility to realise a particular recovery option.
Economic feasibility points to its business and economic potential. Ecological
requirements follow from environmental legislation. In this paper, we shall focus
particularly on the economic feasibility of decision options, and assume that only those
options that pass the technical and ecological feasibility criteria are considered by the
recoverer.
Figure 1 shows the typical steps that are taken during product recovery. When
products reach the recovery shop floor, they are first booked into the company’s
inventory database. Essentially, the book-in process consists of noting the product type
(e.g. laptop), and other information such as the brand, model, etc., if they are visible on
the product. After the products are booked-in, a preliminary sorting is performed whereby
products that need to be inspected and tested are separated. At this ‘pre-sorting’ point, the
available information is inaccurate or incomplete as variability in product specifications
that arise due to customisation or upgrade during usage is not captured, as it requires the
product to be disassembled and inspected.
Figure 1 Product recovery operations (see online version for colours)

Here, three options are available to the recoverer:

1 reuse, if the product is evidently of good enough quality to be reused. Depending on
the type of activity relevant to the recoverer, the ‘reuse’ option would be either in the
form of reusing the whole product through remanufacturing/refurbishing, or reusing
any components under consideration if the recoverer specialises in cannibalisation
2 recycle/discard, if the product is evidently non-reusable
3 inspect and test, if the quality of the product cannot be ascertained with sufficient
certainty, but the product is perceived to be valuable enough to warrant further
testing before the recovery decision is made.
In the third case, additional effort is put in inspection and testing to gather the
information required to decide the product’s reusability. After obtaining the test results, a
final decision about recovery is made.
It can be seen that the pre-sorting decision is clearly made with limited/inaccurate
information, and therefore, has a negative impact on the effectiveness of the decision
made. As an outcome, often low-quality products are sent for inspection and testing,
thereby, decreasing the overall cost effectiveness of the process.
In Section 2.3, we examine some of the emerging technologies that can be used to
alleviate the issues related to information availability.
2.3 Improving data availability during product recovery

To make effective decisions regarding the reusability of a product or its components, the
decision-maker requires information regarding its identity as well as its current condition,
ideally captured and retrieved in an automated fashion. Technologies that enable this are
commonly known as automatic identification and data capture (AIDC) technologies. Two
key technologies currently commercially available and in use for identifying products are
barcodes (1D and 2D) and radio frequency identification (RFID) tags. RFID
(Finkenzeller, 2003) has several advantages over manual scanning using barcodes, since
many tagged items (or embedded components) could be simultaneously and quickly
identified in an automated manner, without the need for line-of-sight to each product or
embedded component. Information associated with a product can be embedded into the
product by capturing that information into the RFID tag. For instance, in Parlikad et al.
(2007), the authors attach RFID tags to several components inside a vehicle (e.g. see
Figure 2) to enable automatic identification of constituent components at the book-in
stage of vehicle recovery.
Sensor-based systems can be used for collecting information regarding the usage of a
product throughout its lifecycle. For instance, Klausner et al. (1998) describe the idea of
‘information system for product recovery (ISPR)’, where product data strongly correlated
to the degradation of components during the usage phase of the product is recorded in an
electronic device called ‘electronic data log (EDL)’ embedded in the product. The data
recorded during the usage phase are retrieved and analysed by the ISPR along with the
static data to provide input for disassembly planning when the product is returned at its
EOL. Similar systems have also been discussed in Simon et al. (2000) and Scheidt and
Zong (1994). The reader is referred to Parlikad and McFarlane (2007) and Parlikad et al.
(2003) for a detailed discussion of these systems. More recently, the EU-funded
PROMISE project (PROMISE, 2006) developed an architecture for capturing and
managing information associated with products throughout their lifecycle. The core
components of this architecture are product embedded information devices (PEID) which
perform the function of AIDC technologies (Jun et al., 2006), and a product data
knowledge management (PDKM) system that manages information about products
throughout their lifecycle (Cassina et al., 2006, 2008).
The use of RFID in improving product recovery has also been investigated by other
researchers (Bajic and Chaxel, 2002; Kulkarni et al., 2007; Payaro, 2004; Saar et al.,
2004; Soga et al., 1999; Thomas, 2003). Zikopoulos and Tagaras (2008) examined
remanufacturing operations and found that quick-sorting enabled by such technologies is
profitable for low-quality products when the costs associated with sorting, disposal and
transportation (between the sorting centre and remanufacturing centre) are low and the
disassembly costs and sorting accuracy are high. The benefits of fast and improved
sorting prior to remanufacturing, where the value of products are highly volatile
(e.g. laptop computers), have been also highlighted in Guide et al. (2005).
However, we need to develop techniques to use this additional information to
improve decision making during the product recovery process. In this paper, we take a
step in that direction by developing a systematic approach to model the product recovery
process taking into consideration the uncertainties involved in making the decisions
involved. We also need to ensure that this approach incorporates additional information
that could be made available to the recoverer to assist in making these decisions.
Figure 2 Vehicle component tagged using RFID (see online version for colours)
Source: (Parlikad et al., 2007).
3 The product recovery decision model
We define the product recovery decision problem by six elements:

PRD H , ), D, U , 3 , 4
H {h1 , h2 ,! , hN H } denotes the set of N H possible (mutually exclusive) states of the

product. For instance, this could be a set of classes that the recoverer assigns based on the
quality of the product, for example, H {excellent, good, fair, bad} . ) : H o [0,1] is
the probability distribution function across the different possible states of the product and
is used to represent the associated uncertainty and the decision-maker’s belief about the
state of the product. A recoverer could derive this prior probability distribution from his
previous experience in a subjective manner or based on historical data.
D {d1 , d 2 ,! , d N D } denotes the set of available recovery options for the product.
Recovery options that are technically and ecologically feasible differ for each product.
Krikke et al. (1998) provide a methodology and guidelines to identify the set of possible
product recovery options for a particular product type.
U : H u D o is the utility function of the payoff resulting from choosing any
particular recovery option. Assuming that the recoverer is risk-neutral, utilities for
recovery options can be expressed in terms of the profit/loss that the recoverer can expect
to obtain from choosing a particular option given the state of the product. This is
essentially a matrix of the form:
ª u (h1 , d1 ) " u (h1 , d N D ) º
« »
U ( H , D) « # u (hi , d j ) # »
« »
¬«u (hN H , d1 ) " u (hN H , d N D ) ¼»
3 {E1 , E2 ,! , EN E } denotes the set of information parameters which are of interest to

the decision-maker. For example, information parameters such as the number of usages
or total time in use would be interesting in establishing the reusability of an automobile
N
clutch. Now, for each parameter E k , the set Ek {e1k , ek2 ,! , ek Ek } represents the set of
data signals that could result as the outcome of a query regarding the parameter. Data
classification is often used for simplifying the analysis, for example, instead of
considering the exact number of clutch usages, one might classify the data into say, three
categories:
1 less than 10,000 times
2 more than 10,000 times but less than 100,000 times
3 more than 100,000 times.
Now, we assume that the outcome of the query for each parameter is conditionally
independent of other parameters given the state of the product, for example, number of
clutch usages is independent of time spent on the clutch given the condition of the clutch.
We can represent the quantitative relationship between individual query responses
and the state of the product by a conditional likelihood distribution as follows:
« k
ª p e1 | h
1 "
N
p ek Ek | h1 º
»
« »
T ( Ek | H ) « #
p ekl | hi # »
« »

« p e1k | hN
«¬ H
" N
p ek Ek | hN H »
»¼
N Ek
Such that ¦ p(ekl | hi ) 1 i, k . Now, 4 P(T ) , where P represents the power set
l 1
over all information parameters. The conditional likelihood distribution is a measure of
how well the query responses support the recoverer’s belief about the state of the product.
For instance, as the value of p(e1k | h1 ) increases, the recoverer can be increasingly
certain that the product’s state is h1 on receiving the data signal e1k as a result of a query.
Similar to the prior probability distribution, the conditional likelihood distribution can be
derived subjectively from experience, or on the basis of historical data.
As the product recoverer performs his queries, thereby receiving data signals
associated with the parameters, his belief associated with the product state should be
revised to reflect the gathered evidence. This revised probability distribution, which is
called posterior distribution can be derived by applying Bayes’ rule, which is stated as
follows:

p ekl | hi p hi
p hi ekl p ekl
We note that a query could return information regarding more than one information
parameter. In such a case, multiple pieces of information can be combined by simply
multiplying the individual likelihoods (assuming conditional independence) to provide
the posterior probability distribution (Jensen and Liang, 1994).
Now, a ‘rational’ decision-maker (Marschak and Radner, 1972) will choose the
option that gives the maximum expected utility (EU). The EU of choosing an option d j
under a given set of information E 3 is defined by:
NH
EU E d j ¦ p hi | E u hi , d j
i 1
Hence, the best decision option is illustrated in the following equation:

NH
d E* arg max
dj
¦ p h i
| E u hi , d j
i 1
The EU of choosing the best option can, therefore, be written as:

NH
EU E d max
dj
¦ p h i
| E u hi , d j
i 1
We have now presented a probabilistic approach to model product recovery decisions,

whereby, we can represent the effect of information availability on the recoverer’s belief
regarding the state of the product. In Section 4, we shall use this approach to examine the
impact of improving the quality of information available at the pre-sorting point on the
efficiency of the product recovery process.
4 Improving the pre-sorting decision by enhanced information
According to the product recovery process outlined in Section 2.2, the product state can
be classified as ‘reusable’ or ‘non-reusable’. Therefore, we have the state-space
H {h1 , h2 } , where h1 represents a reusable product and h2 represents a non-reusable
product. For this state-space, we have the prior probability distribution
) ( H ) [ p(h1 ) p(h2 )] .
The information available to the recoverer consists of pre-sorting information, and the
test result. We can write this set as 3 {Epr , Et } Now, let the outcome of pre-sorting
query be represented by the set Epr {e1pr , epr
2
} , where e1pr indicates that the product is
2
reusable, and epr indicates that the product is not reusable. We can improve the quality of
pre-sorting information by either increasing the information parameters returned by the
pre-sort query, or by improving the accuracy of information. Improved quality of this
information can be modelled by increasing conditional likelihoods p(e1pr | h1 ) and
2
p(epr | h2 ) , and decreasing conditional likelihoods p(e1pr | h2 ) and p(epr
2
| h1 ) . We
assume that no costs are incurred in obtaining this information.
Let us represent the pre-sorting decision by the set T {t1 , t2 } , where t1 represents
the option ‘to test’, and t2 represents the option ‘do not test’. Let the outcome of the test
be represented by set Et {et1 , et2 } , where e1t indicates that the product is reusable, and
et2 indicates that the product is not reusable. We assume that the results of the test
provide perfect information regarding the state of the product, that is,
p(e1t | h1 ) p(et2 | h2 ) 1 and p(e1t | h2 ) p(et2 | h1 ) 0 . Let C be the cost of performing
the test.
The set of recovery options is defined by D {d1 , d 2 } , where d1 is the option to
‘reuse’ the product, and d2 is the option to ‘recycle’ the product. For the two-state two-
option problem considered here, let the utility function be given by:
ª u (h1 , d1 ) u (h1 , d 2 ) º ª u11 u12 º
U ( H , D) «u ( h , d ) u ( h , d ) » «u »
¬ 2 1 2 2 ¼ ¬ 21 u22 ¼
Here, we assume that u11 ! u12 u22 ! u21 .
The following lemma, which is a straightforward result from Equation (4), defines the
EU of not testing.
Lemma 1: The EU of choosing to not test a product after observing the pre-sort result
elpr is given by:

ª u11 p h1 | elpr u21 p h2 | elpr º» ,

EU E t2 | elpr max «
« u p h | e l u p h | el
l 1,2
¬« 12
1 pr
22 2
pr »¼»
We then would want to compare this result with the corresponding outcome if we had
chosen to test the product. In this case, we have to also consider the testing cost. The final
recovery option in this case would depend solely on the test outcome and the following
lemma derives the corresponding EU.
Lemma 2: The EU of choosing to test a product after observing the pre-sort result elpr is
given by:

EU E t1 | elpr
u11 p h1 | elpr u22 p h2 | elpr C , where l = 1,2
Proof: The EU of testing the product is the sum of the maximum expected utilities of the
recovery option chosen based on the test result, weighted by the probability of obtaining
the respective test result. This can be written as follows:
ª u p h1 | e1t , epr
° p e1 | e1 max « 11
l
u 21 p h | e , e º»
2
1
t
l
pr
°
t pr
«u p h | e1 , el p h | e , e »»
° «¬ 12 1 t pr u 22 2
1
t
l
pr ¼

l
EU E t1 | epr ®
° ª u11 p h1 | et2 , epr
l
u 21 p h | e , e º
2
2
t
l
pr

° p et2 | e1pr max «
«u p h | e 2 , el p h | e , e »»
»C
°
¯ «¬ 12 1 t pr u 22 2
2
t
l
pr ¼
Assuming that the test results are perfect, we can deduce that
p(h2 | et2 , epr
l
) p(h1 | et2 , epr
l
) 0 and p(h2 | et2 , epr
l
) p (h1 | e1t , epr
l
) 1 where l 1, 2 .
Combining this with the assumptions u11 ! u12 and u22 ! u21 , we have:

l
EU E t1 | epr
u11 p e1t | epr
l

u22 p et2 | epr
l
C
Now we know that:

p e1t | epr
l
p e | h p h | e p e | h p h | e
1
t 1 1
l
pr
1
t 2 2
l
pr
p e 2
t
l
| epr p e | h p h | e p e | h p h | e
2
t 1 1
l
pr
2
t 2 2
l
pr
Again, from the assumption that the test results are perfect, we have:

p e1t | epr
l
l
p h1 | epr and
p et2 | epr
l

l
p h2 | epr
Substituting the above expressions in Equation (7), we have the lemma proved.
͕
Figure 3 plots the EU generated from testing a product against increasing quality of
pre-sorting information. We can see on the one hand that the EU of testing a
product – when the information available at pre-sorting indicates that the product is
reusable – increases with increasing quality of this information. On the other hand, the
EU of testing a product – when the information available at pre-sorting indicates that
the product is not reusable – decreases as the quality of the information increases. Thus,
we can see that improving the quality of information at pre-sorting can lead to more
effective selection of products to be tested.
Figure 3 Impact of information quality on filtration at pre-sorting (see online version for colours)
In Section 5, we will extend these findings to develop strategies for

1 choosing whether or not to test returned products
2 choosing the best recovery option for these products.
5 Strategies for product recovery decisions
First, we shall examine the product recovery decision to understand the factors that
determine the best recovery option. The following definition helps to understand the
conditions under which the decision-maker chooses different options.
Definition 1 (equilibrium probability): If there are two options D {d1 , d 2 } available for
the returned product, and if that product can exist in two states H {h1 , h2 } , the

equilibrium probability associated with product state hi , p (hi ) , is defined as that
probability of the state hi for which choosing either of the options result in the same EU.
Considering the above definition, the conditions under which the recoverer chooses each
of the recovery option are derived by the following lemma (adapted from Heckerman
et al., 1993):
Lemma 3: The EU of choosing the best option is given by:
1
° u11 p(h1 | E ) u21 p(h2 | E ) if p(h1 | E ) t 1 H / H
° 2 1
EU E (d ) ®
°u p(h | E ) u p(h | E ) if p(h | E ) t 1
°¯ 12 1 22 2 1
1 H 2 / H 1
where H 1 u11 u 12 and H 2 u22 u 21
Proof: From the definition for equilibrium probability, for state h1 , we can write:
u11 p h1 u21 p h2 u12 p h1 u22 p h2
For the binary state-space, p h2 1 p

h1 , Therefore,

u11 p h1 u21 1 p h1
u12 p h1 u22 1 p h1
Rearranging the above equation, we have:
u22 u21 H2 1
p h1
u22 u21 u11 u12 H1 H 2 1 H1 / H 2
͕
Here, H1 can be interpreted as the penalty incurred in a Type I judgment error, that is,
deciding to reject a good product; and H 2 can be interpreted as the penalty incurred in a
Type II judgment error, that is, deciding to reuse a bad product. Also, the equilibrium
probability p (h1) can be interpreted as the lowest probability of the product being good
at which it could be reused. It is straightforward to infer from the above equation that on
the one hand as the ratio of penalties (H1 / H 2 ) increases, the equilibrium probability
decreases (see Figure 4). Therefore, a returned product will have a higher chance of being
reused even with a lower perceived quality if the value of the returned product is high as
compared to the risk involved in reusing it when it is defective.
Figure 4 Equilibrium probability and penalties

On the other hand, for products such as aircraft components and automobile parts, the
risks involved in reusing a faulty product tend to be very high as this could result in
accidents with disastrous consequences. In such cases, the ratio (H1 / H 2 ) would be much
less than 1, resulting in the need for a high-perceived product quality in order to reuse it.
Now, the following theorem will lead to the formulation of strategies for making pre-
sorting and recovery-option decisions.
Theorem 1: Given the information available at pre-sorting E pr , the cost C beyond
which a test that provides perfect information about the product becomes uneconomical
is given by:
1
l
° H 1 p h1 | e pr
°

if p h1 | elpr 1 (H 1 / H 2 )
CdC ®
1
°¯ 2 2
°H p h | el
pr
if p h1 | elpr 1 (H 1 / H 2 )
where elpr is the outcome of the pre-sorting query where l 1, 2 .
Proof: The product will be tested only if it is an economically better proposition.

Therefore, we have:
t l
t1 if EU E t1 | epr l
! EU E t2 | epr
Using Lemmas 1 and 2, we can rewrite the condition for testing the product as follows:

l
ª u11 p h1 | epr l
u21 p h2 | epr º»
u11 p l
h1 | epr u22 p l
h2 | epr C ! max «
« u p h | el u p h | e l
¬« 12 1
pr 22 2 pr »¼»
From Lemma 3, we can write:
1
°
l
l
° u11 p h1 | epr u21 p h2 | epr l
if p h1 | epr t 1 H1 / H 2
l
EU E t2 | epr ®
1
°¯ 12 1
°u p h | el u p h | el
pr 22 2 pr l
if p h1 | epr 1 H1 / H 2
This leads to the following condition that should be satisfied for testing the product:
l
u11 p h1 | epr l
u22 p h2 | epr C
1
°

l
l
° u11 p h1 | epr u21 p h2 | epr l
if p h1 | epr t 1 H1 / H 2
!®
1
°¯ 12 1
°u p h | el u p h | el
pr 22 2 pr l
if p h1 | epr 1 H1 / H 2
The above equation when rearranged will prove the theorem.

A straightforward rearrangement of the above theorem allows us to recommend the

following strategy for the testing decision.
Strategy 1 (product testing strategy): Given product information elpr at pre-sorting,
the optimal strategy for deciding whether to conduct a test that provides complete
information regarding the product is as follows:
C C
t * °t1 if
® H1

p h1 | elpr 1 H2
°t otherwise
¯2
where H1 and H 2 are the penalties incurred in Type I and Type II errors, respectively, in
judging the product quality and C is the cost of testing the product.
Let us, now, examine the product recovery option decision. It is clear that if the
product was tested, the product should be reused only on obtaining a positive test result
( Et e1t ). On the other hand, if the product was not tested, the product can be reused
only if the posterior probability of the product being good given the information available
at pre-sorting is greater than or equal to the equilibrium probability. Therefore, we
recommend the following strategy for the product recovery option decision on the basis
of the pre-sorting results as well as the test decision.
Strategy 2 (product recovery option strategy): Given product information elpr at pre-
sorting and the outcome of the test (if the product was tested), the optimal strategy for
deciding which product recovery option to choose for the product is as follows:

° °t
° °° t1 and Et et1
°° d1 if ® or
d ® ° 1
°
°
°t
°̄
t2 and
p h1 | elpr t
1 H1 / H 2
°
°̄ d 2 otherwise
where H 1 and H 2 are the penalties incurred in Type I and Type II errors in judging the
product quality and C is the cost of testing the product.
In summary, we have derived two key strategies that allow recoverers to decide
whether or not to test a returned product, and finally to choose the appropriate recovery
option. These strategies also show that the critical parameters that affect these decisions
are:
1 the quality of information available to the decision-maker at pre-sorting
2 the ratio of penalties associated with choosing the wrong recovery option
3 the ratios of test cost and the penalties. These strategies are summarised by the
decision tree in Figure 5.
We can clearly see on the one hand that as the cost of test C increases in comparison with
the penalties H1 and H 2 associated with choosing the wrong recovery option, it becomes
less likely that the tests would be beneficial. Although this is intuitive, the above
strategies allow us to quantitatively understand the cases where tests should be done.
Figure 5 Decision tree representing product recovery strategies
On the other hand, if the penalty associated with Type I error H1 increases (high-value
products), the lower limit of the posterior probability of the product being reusable to
avoid testing decreases. Also, as the penalty associated with Type II error H 2 increases
(high-risk products), the upper limit of the probability can be seen to increase. In either
case, there is a higher chance that these products would be sent for testing. However, if
l
the quality of information at pre-sorting p(epr | hl ) is increased, the posterior probability
l
of the product being reusable p(h1 | epr ) would be pushed further to either end of the
probability spectrum, thus, increasing the chance of avoiding costly tests. Therefore, we
can easily conclude that improving the quality of information available at pre-sorting is
highly beneficial for products with high penalties. These findings are broadly in
agreement with Zikopoulos and Tagaras (2008).
We will now illustrate these strategies using a simple example.
5.1 Example
A remanufacturer has to make a decision regarding the reusability of a returned
photocopier. Let H {h1 , h2 } {ok, defective} represents the set of possible states of the
component. Also, let D {d1 , d 2 } {reuse, recycle} represents the two recovery options
available for the recoverer. Further, let the utility function (in Pounds Sterling) be given
by:
ª u11 u12 º ª u (ok, reuse) u (ok, recycle) º ª 300 55º
U ( H , D) «u » «u (defective, reuse) u (defective, recycle) » « 100 55»
¬ 21 u22 ¼ ¬ ¼ ¬ ¼
Furthermore, let the cost of testing the photocopier, C be £60.
Therefore, we have, H1 u11 u12 245 and H 2 u22 u21 155 .
1 C C
? p h1 0.3875; 0.245; 0.387
1 H1 / H 2 H1 H2
Using Strategy 1, we have the following strategy for the testing decision:
t
°t1
®
l
if 0.245 p h1 | epr 0.613
°̄t2 otherwise
We can also write the following strategy for the final product recovery decision as
follows:
*
° °t t1 and Et e1t
°° d1 °
if ® or
d ® °*
°
°
°̄t t2 l
and p h1 | epr
0.613
°̄ d 2 otherwise
The above strategy is illustrated in Figure 6, where we plot the expected utilities of
testing and not testing the photocopier on the basis of the pre-sort information.
From Figure 6, we can infer that unless the recoverer feels that the photocopier is
reusable with a probability of 0.245 – corresponding to region (a) – he should reject the
photocopier without testing it. Between probability values 0.245 and 0.3875 –
corresponding to region (b) – in the absence of any additional information or the option
to test, the photocopier would be rejected, since the probability is less than equilibrium
probability. However, considering the testing cost and the penalty incurred in the lost
opportunity for reuse, performing a test would be beneficial. In region (c) – between
probability values 0.3875 and 0.613 – the photocopier has the potential to be reused,
since it is above the equilibrium probability. However, testing the photocopier would
provide information, that is, beneficial considering the penalty that could be incurred if a
faulty photocopier is reused. Beyond a probability of 0.613 – corresponding to region (d)
– the cost incurred in testing the photocopier would offset that penalty, since the
probability of the photocopier being faulty is sufficiently low. Hence, in this case, the
photocopier should be reused without testing.
The key benefit of improving the quality of information available to the recoverer at
pre-sorting is that it reduces the number of faulty photocopiers that are tested, and in an
ideal scenario, eliminate the need to test the products completely. From Figure 6, the
ideal scenario is where the information available at the pre-sorting point results in all
faulty photocopiers being assigned a posterior probability of being reusable in region (a),
and all reusable photocopiers being assigned a posterior probability of being reusable in
region (d).
We shall now conclude this paper, highlight the key contributions and some of the
limitations of this work, and also pointing out some future work.
Figure 6 Illustration of product recovery strategies (see online version for colours)
6 Conclusions
In this paper, we explained the manner in which product recovery decisions are made,
and showed that the major factor that affects the effectiveness of this process is the lack
of readily available information about the product. This results in inefficiencies due to the
large number of products tested. We also provided an overview of different emerging
technologies and systems that could help in improving the information available to
recoverers. Although this paper examines specific issues during the end-of-life phase of a
product’s lifecycle, the capabilities of these technologies can be exploited to improve key
decisions along all the phases of the product lifecycle.
To show the quantitative impact of uncertainty, information availability and costs on
the effectiveness of product recovery, we developed a probabilistic technique for
modelling product recovery decisions and processes. Using this model, we showed that
improving the quality of information available to the product recoverer can improve the
effectiveness of the product recovery process by reducing the need for extensive testing.
We also showed that conditional likelihood distributions of query responses provide a
systematic means to model and evaluate the quality of available information, and help us
in quantitative evaluation of the impact of improving information quality.
The strategies for testing and recovery option decisions developed in this paper
enable recoverers to understand the relationship between the costs and penalties involved
in the recovery process in a simple manner. We showed that the following three key
ratios have a major impact in the product recovery process:
1 ratio between the penalties incurred in choosing the wrong recovery option H1 / H 2
2 ratio between the cost of testing and the penalty of Type I judgement error C / H1
3 ratio between the cost of testing and the penalty of Type II judgement error C / H 2 .
We also conclude that improving quality of information available at pre-sorting is highly

beneficial for products with high penalties, and also where testing costs are high.
Moreover, these strategies could form the basis for decision rules to be used in
decision support systems that guide recoverers through the recovery process. A prototype
of such a decision support system has been already developed as part of the PROMISE
project for automobiles, and it is presented in Parlikad and McFarlane (2008), where
component cannibalisation is examined and disassembly costs are also considered in
addition to testing costs.
This paper suffers from some limitations that arise due to the assumptions made. In
particular, we assume that there is no cost incurred in obtaining the pre-sorting
information. Although the costs involved in this would be relatively low in comparison
with the costs incurred in testing the product, incorporating another variable representing
this cost would allow us to develop techniques to optimise the quality of information that
should be made readily available. In addition, we also assume that the test provides
complete information about the product. Although this is relatively realistic, allowing for
some incompleteness in testing will allow us to design an appropriate information
provision strategy whereby the optimal amount of information can be provided by a
combination of AIDC technologies and product testing, considering the costs involved.
The modelling approach presented here provides an ideal means to perform such
analyses.
Another area for extension of the model presented here is to include the effects of
demand and supply. At the moment, we implicitly assume that there is an unlimited
supply of EOL products and all products selected for reuse are absorbed by the market. A
combination of our model with that presented by Zikopoulos and Tagaras (2008) would
be extremely valuable. A further extension to this would then be to include the effect of
value volatility as discussed in Guide et al. (2005).
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Strategies for product recovery decisions

Article in International Journal of Product Lifecycle Management · February 2009

Ajith Kumar Parlikad Duncan Mcfarlane

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Strategies for product recovery decisions

Ajith Kumar Parlikad* and

Abstract: Product recovery is beset by uncertainty regarding the quality of

Keywords: decision analysis; applied probability; uncertainty modelling;

Reference to this paper should be made as follows: Parlikad, A.K. and

Biographical notes: Ajith Kumar Parlikad is a Lecturer of Automation and

Duncan McFarlane is a Professor of Service Support Engineering at the

Copyright © 2009 Inderscience Enterprises Ltd.

2.1 Product recovery management

insights on several aspects of reverse logistics including network design, inventory

2.2 Product recovery operations and decisions

Figure 1 Product recovery operations (see online version for colours)

Here, three options are available to the recoverer:

2.3 Improving data availability during product recovery

Source: (Parlikad et al., 2007).

3 The product recovery decision model

We define the product recovery decision problem by six elements:

H {h1 , h2 ,! , hN H } denotes the set of N H possible (mutually exclusive) states of the

3 {E1 , E2 ,! , EN E } denotes the set of information parameters which are of interest to

Hence, the best decision option is illustrated in the following equation:

The EU of choosing the best option can, therefore, be written as:

We have now presented a probabilistic approach to model product recovery decisions,

4 Improving the pre-sorting decision by enhanced information

In Section 5, we will extend these findings to develop strategies for

5 Strategies for product recovery decisions

where H 1 u11  u 12 and H 2 u22  u 21

u11 p h1  u21 p h2 u12 p h1  u22 p h2

For the binary state-space, p h2 1  p

Figure 4 Equilibrium probability and penalties

where elpr is the outcome of the pre-sorting query where l 1, 2 .

Proof: The product will be tested only if it is an economically better proposition.

A straightforward rearrangement of the above theorem allows us to recommend the

Figure 5 Decision tree representing product recovery strategies

Therefore, we have, H1 u11  u12 245 and H 2 u22  u21 155 .

We also conclude that improving quality of information available at pre-sorting is highly

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where H 1 u11 u 12 and H 2 u22 u 21

u11 p h1 u21 p h2 u12 p h1 u22 p h2

For the binary state-space, p h2 1 p

Therefore, we have, H1 u11 u12 245 and H 2 u22 u21 155 .