Managing the inter‐functional tension between accounting‐ and financial‐profits in remanufacturing multiple‐usecycle products

We investigate the tension between accounting and financial functions of an OEM who manufactures and remanufactures capital‐intensive products. The OEM operates a servicizing business model in which it leases a product, remanufactures the product returned at the end of the lease, and re‐leases the remanufactured product (usecycle), with multiple such usecycles. The accounting function at the firm would suggest that the OEM: (i) recovers the initial manufacturing cost of the product over its useful life as prescribed by IRS guidelines via depreciation; (ii) remanufactures the product as long as its initial manufacturing cost is not fully recovered; and (iii) removes the product from the books immediately after it has completely depreciated. In contrast, the financial function would consider the initial manufacturing cost of the product to be a sunk cost and would suggest that the firm continues to remanufacture the product as long as the remanufacturing cost is lower than the cost of a new unit. In this study, we investigate and prescribe ways to resolve this tension using analytical models. Specifically, we first show that the optimal durations over which the product should be used and lease prices that maximize the OEM's accounting profit and financial profit are different. We then discuss two operational approaches to align the accounting and operational perspectives while following IRS guidelines. Finally, informed by this analysis, we develop policy prescriptions to promote remanufacturing of multiple usecycle products. Overall, this analysis highlights the role of regulatory guidelines on remanufacturing operations and the inter‐functional effort required by OEMs to successfully integrate remanufacturing operations in their business strategy.