Sustainable sourcing including capacity reservation for recycled materials: A newsvendor framework with price and demand correlations

Critical raw materials like rare-earth elements are essential inputs for the production process of many electronic products, but also for environmentally-friendly green-energy technology products. The market for these materials faces high uncertainty associated with their supply. The use of recovered raw materials can help to mitigate the risk and simultaneously pave the way towards a circular economy. We investigate a sourcing strategy faced by a manufacturer considering the possibility to source critical raw materials from a supplier offering recycled material. As the recycling efficiency of these materials is still an ongoing research, and return flows from end-of-life products are highly volatile, we also rely on virgin material. We develop a single-period inventory model with procurement from a supplier offering recycled material according to a capacity reservation contract and a reactive supplier (spot market) offering virgin material. We consider uncertainties of demand, prices and recycling quantities as well as potential dependencies, in particular dependencies between prices for virgin and recycled materials and prices and demand. We provide results on the optimal policy structure and obtain a closed-form solution as a bound of the optimal procurement quantity. Our analysis gives us first insights on the effect of different economic parameters on the ordering decision. In an extensive numerical analysis we then study the impact of correlation on our results in order to derive managerial implications. We show that considering correlation when using such a sourcing strategy is especially important in environments with high demand uncertainty, high virgin material prices and yield uncertainty.