Pareto Improving Supply Chain Coordination Under a Money-Back Guarantee Service Program

Abstract

Abstract. Money-back guarantee (MBG) is a well-known service offered by many retailers. Under the MBG policy, a purchased item by a consumer can be returned for a full refund. In this paper, we explore a supply chain (SC) system comprising of one retailer, which offers the money-back guarantee policy and faces a stochastic demand. With a given supply contract offered by the supplier, the retailer makes decisions on the order quantity and the market coverage of the money-back guarantee service. With reference to real-world practices, we examine three models, namely, (1) the traditional wholesale pricing model without the buyback contract, (2) the model with a buyback contract (between the supplier and the retailer) for unsold items, and (3) a dual-buyback (DB) contract model for both unsold and consumer returned items. We find that using the buyback contract alone for unsold items cannot achieve Pareto improving supply chain coordination, whereas the DB contract can. Numerical findings also indicate that the DB contract can lead to an expansion of the money-back guarantee service program to cover more customers. This paper's findings support the implementation of the DB contract, which is commonly seen in the industry, for efficient supply chain management in the presence of the money-back guarantee service program.

Taking stock of consumer returns: A review and classification of the literature

“…To achieve coordination, the authors introduce a novel differentiated buyback contract that is contingent on the return deadline set by the retailer. Heydari et al () find that wholesale pricing and buyback contracts cannot simultaneously achieve Pareto improving coordination for both parties in a two‐echelon supply chain. The authors show that a differentiated buyback contract can help achieve this goal.…”

“…For example, Mukhopadhyay and Setaputra (2004) model returns as R = ϕ + ψr, where ϕ is a base return amount and ψ denotes customer sensitivity to monetary leniency. Several works, such as Li et al (2017), Heydari et al (2017), and Batarfi et al (2017), express returns volume only as a deterministic fraction of demand without a returnspecific sensitivity parameter, and we therefore classify them as not having a return sensitivity. In general, demand and return sensitivity across papers use consistent assumptions regarding the relationship between demand and return volumes and retailer decisions.…”

Incentive mechanism based on cooperative advertising for cost information sharing in a supply chain with competing retailers

“…So far, many coordinative contracts have been proposed for supply chain coordination, such as, revenue sharing (Alaei and Setak 2015;Qin and Yang 2008), cost sharing (Tsao and Sheen 2012), revenue and cost sharing (Panda 2013), buyback (Heydari et al 2017;Pasternack 2008), combined buyback and quantity discount (Heydari and Norouzinasab 2015;Parthasarathi et al 2011), quantity flexibility (Tsay 1999), lead time induced contract (Heydari 2014a;Heydari et al 2016), delay in payments contract (Heydari 2015), and pricing schemes and discount contracts (Chaharsooghi et al 2011;Heydari 2014b). Instead, there are few works which studied how to design a coordinative contract to motivate the supply chain members to share their information.…”

Supply chain coordination with sales-rebate contract

“…Многочисленные исследования показывают, что для эффективной работы цепи поставок необходима высокая степень интеграции и координации между участниками [Березинец, Зенкевич, Никольченко, 2018;Whang, 1995;Lariviere, 1999;Ghosh, Khanra, 2018;Sadeghi et al, 2019], так как интересы компаний -участников цепи не всегда совпадают с интересами всей цепи. Цель координации цепи поставок можно сформулировать следующим образом: повысить результативность всей цепи поставок без ухудшения результативности деятельности компаний -участников цепи и разделить риски участников цепи между заинтересованными сторонами [Tsay, Lovejoy, 1999;Heydari, Choi, Radkhah, 2017;Huang, He, Li, 2018].…”

“…Другие исследователи, используя теоретико-игровой подход к определению координирующего контракта, моделируют ситуацию заключения контракта между двумя участниками цепи как игру двух лиц, решением которой является набор таких параметров контракта, которые обеспечивают равновесие по Нэшу [Зенкевич, Гладкова, 2018;Cachon, 2003]. Следуя за [Cachon, 2003], авторы [Heydari, Choi, Radkhah, 2017;Heydari, Asl-Najafi, 2018] считают, что контракт является координирующим, если он позволяет максимизировать ожидаемую прибыль цепи поставок и обеспечить парето-оптимальность полученного решения. Иными словами, при использовании координирующего контракта не существует другого набора параметров, для которого ожидаемые прибыли участников цепи не меньше, чем без применения контракта, и хотя бы у одного из них такая прибыль больше [Heydari, Choi, Radkhah, 2017].…”