The Impact of Consumer Returns on Supply Chain Coordination
Professor Ana Muriel, mechanical and industrial engineering, will deliver the first lecture in the Fall 2005 Operations Research / Management Science Seminar series.
Title: The Impact of Consumer Returns on Supply Chain Coordination
Abstract: In an effort to attract buyers in a highly competitive marketplace, consumer return policies have been drastically relaxed in the last decade. Most mass merchandisers offer full refund within 30-90 days of purchase; no questions asked. As a result, return rates from consumers to manufacturers or retailers are often in the range of 6% to 15%. Furthermore, for mail order companies and e-tailers, they can be as high as 35%. Managing consumer returns effectively thus becomes essential to business profits. This is one of the goals of the new and growing field of Reverse Logistics.
In this talk, we investigate the effect that consumer returns have in the coordination of the supply chain with and without contracts. We consider a two-echelon supply chain with a single manufacturer and a single retailer that faces stochastic price-dependent demand in a single period. The retailer receives the items and commits to a selling price at the start of the season, having no additional replenishment opportunity. Logistics costs related to consumer returns are incurred at both the retailer and at the manufacturer sites. Typically, a small percentage of this cost is paid by the retailer, corresponding to the handling of such returns. Meanwhile, the manufacturer faces the larger share, including transportation, inspection and possibly the remanufacturing of the product.
We first derive the optimal centralized and decentralized solutions for this supply chain and then consider buy back contracts in which the manufacturer fixes a wholesale price for the product and a repurchase price for the unsold items at the end of the season.
Computational experiments are performed to study the practical impact that consumer returns have on the decision making process and on the coordination of the supply chain. The results obtained are counterintuitive: 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.
This series is organized by the UMass Amherst INFORMS Student Chapter. Support for this series is provided by the Isenberg School of Management, the Department of Finance and Operations Management, and the John F. Smith Memorial Fund.
Check here for more details about this speaker series.
