Manufacturer’s quality improvement and Retailer’s In-store service in the presence of customer returns

A manufacturer can improve product quality and a retailer can provide in-store service in order to improve customer satisfaction and manage customer returns in a supply chain. In this paper, we develop a model for a supply chain in which the retailer offers a full-refund customer returns policy, and the customer is heterogenous in willingness-to-pay for product quality and faces uncertainty as to the fitness of the product. We examine the manufacturer’s optimal quality improvement strategy and the retailer’s optimal in-store service strategy. Our study shows that the optimal customer returns management strategy from the perspective of the supply chain as a whole coincides with the individual interests of both the manufacturer and the retailer. We show that each of the four supply chain strategies (no quality improvement and no in-store service, in-store service but no quality improvement, quality improvement but no in-store service, and both quality improvement and in-store service) can be a dominant supply chain strategy, depending on several factors. These factors include the degree of the increase in product quality and/or the degree of the increase in the likelihood of the customer’s satisfaction due to in-store service, and the relative efficiencies of producing and selling the product with/without the manufacturer’s quality improvement and/or with/without the retailer’s in-store service. We show that when either the manufacturer can flexibly determine the quality improvement level, or the retailer can flexibly adjust in-store service level, or both can decide their respective strategies, the dominant strategy includes both in-store service by the retailer and quality improvement by the manufacturer.