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Supply chain coordination in the presence of consumer returns

Rocio Ruiz-Benitez, University of Massachusetts Amherst


We study the effect that consumer returns have on the coordination of a two-echelon supply chain with a single manufacturer and a single retailer that faces stochastic demand and a certain proportion of consumer returns for a single product. Returned goods command a full refund and result in reverse logistics costs for both retailer and manufacturer. The manufacturer sets a wholesale price for the product and may also set a repurchase price at which she will buy any product left over at the retailer at the end of the selling season. The selling price for the product may be either given exogenously or a variable under the retailer's control given stochastic, price-dependent demand. The retailer sets the order quantity and in the latter case also the selling price. We analyze the optimal centralized and decentralized profit maximizing solutions and compare the optimal actions and profits with those associated with the classical model that ignores consumer returns. The results we obtain are counterintuitive: (1) higher profits and better coordination can be achieved when the players acting in a decentralized fashion do not consider any information about consumer returns as they make their pricing and ordering decisions, (2) retailer, manufacturer and total supply chain profits increase as the retailer faces a larger share of the logistics costs associated with consumer returns, (3) buy-back contracts may be detrimental to supply chain coordination if consumer returns are ignored in the decision-making process. We also study the case in which the retailer postpones his pricing decision until after demand uncertainty is resolved when commercial returns are present in the system. We observe that also, under the presence of commercial returns, the price postponement strategy leads to larger expected profits for both, manufacturer and retailer, and thus, a better coordination of the supply chain. In the last part of this dissertation, we study the Returns Allowance Credit Contract. This new type of contract is implemented when commercial returns are present in the supply chain and the retailer bears all the logistics costs associated with the returns. The manufacturer offers certain returns allowance credit in order not to lose retailer's good will.

Subject Area

Management|Operations research

Recommended Citation

Ruiz-Benitez, Rocio, "Supply chain coordination in the presence of consumer returns" (2007). Doctoral Dissertations Available from Proquest. AAI3275771.