On supply chain coordination for false failure returns: A quantity discount contract approach

Ximin Huang, Sin Man Choi, Wai Ki Ching, Tak Kuen Siu, Min Huang

Research output: Contribution to journalArticlepeer-review

64 Scopus citations

Abstract

A large proportion of consumer returns fall into the category of false failure returns, which refer to returns without functional defects. In this paper, we consider profits resulting from exerting costly effort to reduce false failure returns in a reverse supply chain. The supply chain as a whole has a strong incentive to reduce such returns for cost saving. However, retailers typically enjoy a full credit provided by suppliers for returns, so they may not have sufficient incentives to exert enough effort for supply chain profit maximization. In some scenarios retailers may even have the motivation to encourage such returns. We suggest using a coordination contract to resolve this profit conflict. We introduce a quantity discount contract which specifies a payment to the retailer with an amount exponentially decreasing in the number of returns. We present explicit forms of such contracts given different assumptions about the distribution of the number of returns. We also prove that the contract is Pareto improving. Besides, it is shown that when the contract is applied in a closed-loop supply chain, it can deter retailer's potential incentive to encourage returns. Moreover, some modifications of the contract can lead to easy allocation of supply chain profit.

Original languageEnglish (US)
Pages (from-to)634-644
Number of pages11
JournalInternational Journal of Production Economics
Volume133
Issue number2
DOIs
StatePublished - Oct 10 2011

Bibliographical note

Funding Information:
Research supported in part by GRF Grant no. 7017/07P , HKU CRCG Grants and HKU Strategic Research Theme Fund on Computational Sciences. The authors would like to thank the referee for the useful comments and suggestions.

Keywords

  • Closed-loop supply chains
  • Consumer returns
  • Quantity discount contract
  • Supply chain coordination

Fingerprint Dive into the research topics of 'On supply chain coordination for false failure returns: A quantity discount contract approach'. Together they form a unique fingerprint.

Cite this