Increasing legislative and societal pressures are requiring manufacturers to operate more sustainably and to take responsibility for the fate of their goods after they have been used by consumers. This paper models a hybrid system in which new goods are produced and used goods are remanufactured. Newly produced goods and remanufactured goods are sold on separate markets, but can also act substitutes for each other. A semi-Markov Decision Process formulation of this problem is presented and is used to obtain an optimal policy, which specifies production, recovery and substitution decisions. The model is used explore the properties of this hybrid remanufacturing system, and in particular, the managerial implications associated with upward and downward substitution strategies are investigated.