Analysis of the impact of price-sensitivity factors on the returns policy in coordinating supply chain

This paper analyzes the impact of price-sensitivity factors on characteristics of returns policy contracts in a single-period product supply chain. The contract considers stochastic and price-dependent demand. We present an analytical model and then use numerical methods with the Stackelberg game to identify the contract properties. We numerically show that a returns policy indeed improves supply chain performance. However, the benefits earned from the returns policy, under price-sensitive and variable demand, are different for different supply chain partners. First, when price-sensitivity is high, profit of the manufacturer decreases with increase in demand variability. Second, when price-sensitivity is sufficiently high and demand variability increases, the manufacturer has to surrender part of the profits to the retailer, in order to continue sales. However, even after surrendering part of the profits to the retailer, the manufacturer still earns profits that are higher than those available in a wholesale price contract. Last, from the perspective of division of channel profits, the retailer is always worse off in case of returns policies than in a wholesale price contract. Therefore, to apply this form of incentive in practice, managements should consider the impact of price-sensitivity on the returns policy and its performance.     

Channel incentives in sharing new product demand information and robust contracts

Demand for a new product is often highly uncertain. As the developer of a new product, the manufacturer may reduce the uncertainty of the product’s demand through observing progress in his product development process or receiving demand signals directly from customers. This paper first shows that a centralized channel always benefits from improved demand information. Yet, to realize this benefit in a decentralized manufacturer–retailer channel, the manufacturer needs to disclose his private demand information to the retailer. We show that the manufacturer’s incentive to share his improved demand information depends on the supply contract signed with the retailer. Furthermore, mandating the manufacturer to disclose his improved demand information can actually reduce the total channel profit. We provide managerial insights by analyzing three widely used contract forms. We investigate whether these contracts are robust under an unanticipated demand information update observed by the manufacturer. We show that the quantity flexibility contract with a high return rate is not robust. The buyback contract, however, is robust and always achieves information sharing while preserving channel performance.     

The impact of customer returns on supply chain decisions under various channel interactions

We examine a supply chain in which a manufacturer supplies a single product to a retailer who faces two forms of customer returns. We compare the impact of these two forms of customer returns on the decisions and profits of the manufacturer and the retailer under various types of channel interaction: Manufacturer Stackelberg (MS), Vertical Nash (VN), and Retailer Stackelberg (RS). We find that when the level of customer returns that are proportional to quantity sold is extremely high, the retailer prefers the MS rather than the RS channel interaction. We also examine the impact of the asymmetric customer returns information on the decisions of the manufacturer and the retailer and on profits under MS and VN channel interactions. We show that in the MS case, the retailer can decide whether or not to share customer returns information with its manufacturer without knowing the manufacturer’s estimates of customer returns and in the VN case, both the retailer and the manufacturer can decide whether or not to share/acquire the information based on observation of the other’s behavior. The issues of sharing this information are also discussed.     

The impact of sharing customer returns information in a supply chain with and without a buyback policy

In this paper, we examine a single period problem in a supply chain in which a Stackelberg manufacturer supplies a product to a retailer who faces customer returns and demand uncertainty. We show that the manufacturer incurs a significant profit loss with and without a buyback policy if it fails to account for customer returns in the wholesale price decision. Under the assumption that the retailer is better informed than the manufacturer on customer returns information, we show that without a buyback policy, the retailer prefers not to share if the manufacturer overestimates while it prefers to share customer returns information if the manufacturer underestimates this information. If the manufacturer offers a buyback policy, we have the opposite results. We also discuss incentives to share the customer returns information and some of the issues that are raised in sharing this information.     

Cooperative Advertising in a Marketing Channel

This paper examines dynamic advertising and promotion strategies in a marketing channel where the retailer promotes the manufacturer product and the manufacturer spends on advertising to build a stock of goodwill. We assume that sales depend on goodwill and promotion activities and that there are decreasing marginal returns to goodwill. Two scenarios are studied. First, the manufacturer and retailer determine noncooperatively their respective strategies. Second, the game is played à la Stackelberg with the manufacturer as the leader who supports partially the cost of the promotion activities of the retailer. In both cases, stationary Markovian strategies are characterized. These scenarios are examined also in the absence of decreasing marginal effect of goodwill on sales. The results show that, whether or not the goodwill stock has a decreasing marginal effect on sales, the cooperative advertising program is a coordinating mechanism in the marketing channel, i.e., both players receive higher payoffs.     

Pricing/inventory decisions and profit shares in a non-integrated marketing channel for a single-period product

We consider the situation in which the manufacturer of a single-period product first sets the unit wholesale price and then the retailer responds with an order size. We present mostly analytical results on the effects of the problem's environmental parameters (such as shortage cost and demand uncertainty) on the optimal decisions (ie, the unit wholesale price and retailer's order size) and on the expected profits of the manufacturer and of the retailer. Some of these effects are counter-intuitive and/or contradict related results published recently for similar models. The most important finding is that demand uncertainty is always harmful to the manufacturer but is very often beneficial to the retailer. This means that when the manufacturer can set the wholesale price, the manufacturer should be much more supportive (or even aggressive) than previously advised towards activities such as market surveys and ‘Quick Response’ that reduce the retailer's market uncertainty; in contrast, the retailer need not be as enthusiastic about these activities.     

Consumer returns reduction and information revelation mechanism for a supply chain

In this paper, we develop two revelation mechanism models of a supply chain consisting of one manufacturer and one retailer under asymmetric information, where the retailer provides store assistance (SA) to reduce consumer returns rate and increase demand. Under full information, we find that a higher returns rate or returns handling cost increases the SA level if the market scale is sufficiently high. In the demand information asymmetry model, we find that: (i) the low-type retailer (facing a low demand) has no incentive to distort demand information while the high-type retailer may report wrong information; (ii) the manufacturer would like to design a menu of wholesale price-order quantity contract to induce truthful demand information and the manufacturer pays an information rent to the high-type retailer if the returns rate or returns handling cost for the retailer is sufficiently low; (iii) asymmetry of information does not change the monotonicity of the unit wholesale price in the retailer’s type, and information asymmetry decreases the retail price but increases the SA level. Unlike the demand information asymmetry model, a higher retailer’s returns handling cost expands the effects of information asymmetry on the retail price and the SA level, and using revelation mechanism decreases the channel profit if the retailer’s returns handling cost is sufficiently high under the returns rate information asymmetry model.     

The impacts of the full returns policy on a supply chain with information asymmetry

In contrast to the existing return policies literature assuming that information is symmetrical between the manufacturer and the retailer, we study the full returns policy’s impact on supply chains with information asymmetry. We first study the case that the base level of the demand follows a discrete distribution with two states. We find that the retailer benefits from the full returns policy in all circumstances, while the manufacturer and the supply chain are better off under some conditions. We then consider the situation in which the base level of the demand is a type of AR(1) process.     

Coordinating a decentralized supply chain with customer returns and price-dependent stochastic demand using a buyback policy

We investigate a decentralized supply chain that consists of a manufacturer and a retailer where the retailer simultaneously determines the retail price and order quantity while experiencing customer returns and price dependent stochastic demand. We propose an agreement between the manufacturer and the retailer that includes two buyback prices, one for unsold inventory and a second for customer returns, and show that this type of easy-to-implement agreement can achieve perfect supply chain coordination and be a win-win for both manufacturer and retailer when a complementary profit-sharing agreement is included.     

Pareto analysis of supply chain contracts under satisficing objectives

Supply chain coordination has become critical to firms as increased pressure is placed on them to improve performance. We evaluate the performance of Push, Pull, and Advance-purchase discount (APD) contracts in a manufacturer-retailer supply chain where one or both firms have a satisficing objective of maximizing the probability of achieving a target profit. We identify the resulting operational modes of the supply chain and potential conflicts over the preferred contracts under the Push, Pull, and APD contracts. When both firms are satisficing, conflict over the preferred contract arises when the manufacturer has an ambitious profit target or the retailer has a low profit target. We show that the Push contract can result in a large decrease in the expected profit of a risk-neutral manufacturer when the retailer maximizes the probability of achieving her maximum expected profit. We find that a modified buy-back and profit guarantee contracts can provide significant Pareto improvement over Push or APD contracts when the manufacturer is risk-neutral and the retailer is satisficing, while revenue-sharing contracts cannot. In contrast, revenue sharing and modified buy-back contracts are Pareto dominant under certain conditions when the manufacturer is satisficing and the retailer is risk-neutral.