Consumer Returns Policies and Supply Chain Performance

Abstract

This paper develops a model of consumer returns policies. In our model, consumers face valuation uncertainty and realize their valuations only after purchase. There is also aggregate demand uncertainty, captured using the conventional newsvendor model. In this environment, consumers decide whether to purchase and then whether to return the product, whereas the seller sets the price, quantity, and refund amount.Using our model, we study the impact of full returns policies (e.g., using 100% money-back guarantees) and partial returns policies (e.g., when restocking fees are charged) on supply chain performance. Next, we demonstrate that consumer returns policies may distort incentives under common supply contracts (such as manufacturer buy-backs), and we propose strategies to coordinate the supply chain in the presence of consumer returns. Finally, we explore several extensions and demonstrate the robustness of our findings. AbstractThis paper develops a model of consumer returns policies. In our model, consumers face valuation uncertainty and realize their valuations only after purchase. There is also aggregate demand uncertainty, captured using the conventional newsvendor model. In this environment, consumers decide whether to purchase and then whether to return the product, while the seller sets the price, quantity, and refund amount.Using our model, we study the impact of full returns policies (e.g., using 100% money back guarantees) and partial returns policies (e.g., when restocking fees are charged) on supply chain performance. Next, we demonstrate that consumer returns policies may distort incentives under common supply contracts (such as manufacturer buy-backs), and we propose strategies to coordinate the supply chain in the presence of consumer returns. Finally, we explore several extensions and demonstrate the robustness of our findings.

Taking stock of consumer returns: A review and classification of the literature

“…We introduce our classifiers in Table for each of the four domains in our framework. Table also presents the classification of Su () and Bonifield et al (). The presence [absence] of a check mark signifies that the respective analytical and empirical models in Su () and Bonifield et al () incorporate [do not incorporate] modeling constructs corresponding to the classifier indicated by the row.…”

Ordering and returns handling decisions and coordination in a supply chain with demand uncertainty

“…Under the assumption of stochastic salvage capacity, Lee and Rhee () propose three coordination contracts: buyback with early salvage subsidy, buyback with price protection, and buyback with final salvage subsidy contracts. When the retailer accepts consumer returns, some works study how to design a buyback contract to coordinate a supply chain, such as Su (), Xiao et al. (), Chen (), Chen and Bell (), Liu et al.…”

“…(), where they do not examine the impact of consumer returns rate on buyback price. Su () investigates two coordination mechanisms: Direct‐to‐manufacturer returns and differentiated buybacks, whereas they do not compare the two strategies and do not study the optimal reverse channel structure strategy, which are our main research issues.…”

“…Typically, a manufacturer has two returns handling strategies (reverse channel structure strategies): manufacturer handling ( M ) and retailer handling ( R ). Under strategy M , the manufacturer collects and handles the returned items by itself (Su, ). This case is especially suitable to the online selling activities, where the retailer is only responsible for selling, and the after‐sales service is provided by the manufacturer.…”

“…In some situations, for example, when the retail price is treated as exogenous, the manufacturer's buyback contract (returns policy) can coordinate the supply chain under demand uncertainty (Pasternack, ). Under a buyback contract, the manufacturer buys back the leftovers (e.g., unsold inventory) from the retailer at the end of a selling period, which encourages the retailer to order more because the manufacturer shares some inventory risk with the retailer (Su, ; Chen and Bell, ). In our study, we design a buyback contract to coordinate the supply chain under retailer handling and manufacturer handling strategies, respectively.…”