Managerial Efficiency and Reverse‐Flow Complexity in a Circular Economy

ABSTRACT A Circular Economy (CE) is a system in which products are collected after customers have used them, remanufactured, and then put back into circulation for further use. This reduces the need for virgin materials to manufacture new units and wastage from used units. However, it is well known that delays in inventory returns often lead managers to make suboptimal ordering decisions. This problem is particularly significant in CE systems, where inadequate inventory management can significantly reduce or even negate the benefits of CE. The existing literature lacks evidence on the magnitude of this issue and its key contributing factors. Addressing this gap is essential for developing operational details and maximizing the benefits of CE systems. Using a novel complexity ordering based on a formal characterization of the reverse flow of goods, we investigate the efficiency of managerial decision‐making. In our experimental study, participants made inventory replenishment decisions in various CE systems that differed in the complexity of reverse flow. We found that participants' operating costs were substantially higher than the simple benchmark costs, and as the CE system became more complex in reverse flow, the suboptimality of managerial decision‐making worsened. Our experimental results provide prescriptions and guidance for practitioners by identifying: (i) CE configurations for which managerial decision‐making tends to be better, and (ii) behavioral nudges to improve the efficiency of decision‐making.