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Jenny Chen, Rowe School of Business

Supply chain strategy in the presence of customer returns

Retail product returns are a crucial component of the customer-retailer relationship. Return rates have increased in recent years and are particularly high for online sales (typically 20% to 40%). Worldwide, customers return an estimated $642.6 billion worth of goods per year. For the management of customer returns, manufacturers typically use buyback contracts, while retailers use returns policies. Viewing the supply chain as a whole, we investigate customer returns management strategies by developing a game theoretical model for a manufacturer’s Stackelberg supply chain facing customer returns. The manufacturer chooses either a buyback contract or a wholesale-price contract, and the retailer chooses a returns policy—either a money-back guarantee (MBG) or no returns—and decides whether to resell returned products as open-box products.

Working with a PhD student, we will address: 1) What are the optimal supply chain strategies with regard to the manufacturer’s choice of contract and the retailer’s choice of returns and resale policies? 2) When should the retailer offer an MBG or a no-returns policy? 3) How do the manufacturer’s choice of contract and the retailer’s choice of returns and resale policies affect the manufacturer’s wholesale price, the retailer’s selling price and demand, and the profits of the manufacturer and the retailer? By deriving the optimal solution to each of these supply chain decisions, we will identify the optimal strategies of the supply chain. We aim to provide some new insights and implications to supply chain management in the presence of customer returns.