Returns policy, in-store service, and contract strategies in the presence of customer returns

Returns policies and in-store retail service are widely used strategies for managing customer returns. In this paper, we consider a supply chain with a manufacturer and a retailer, in which the retailer should decide its returns policy strategy by choosing between a no-refund policy (NR) or a money-back guarantee policy (MBG), as well as deciding whether to provide in-store service. We identify the retailer’s optimal returns policy and in-store service strategies. We find that while the net salvage value of a returned product is a key factor influencing the retailer’s decision on its optimal returns policy, the retailer’s in-store service strategy is dependent on its chosen returns strategy. We show that offering an MBG policy can expand the market coverage of the supply chain, while providing in-store service does not yield the same effect. The retailer’s optimal returns policy and in-store service benefit the manufacturer. However, there are cases where providing in-store service is not optimal for the retailer, but the manufacturer can benefit from it. In such circumstances, the manufacturer can use a contract to incentivize the retailer to provide in-store service. We also discuss extensions of the model to examine the impact of a non-zero residual value of the unsatisfactory product under an NR policy on the retailer’s decisions, and where the retailer endogenously determines its service level through numerical exploration.