Quantity discount contract for supply chain coordination with false failure returns

Abstract

Consumer return attracts more and more academic attention due to its rapidly expanding size, and a large portion of it falls into the category of false failure return, which refers to return without functional defect. In this paper, we exclusively consider profit results from exerting costly effort to reduce false failure returns in a reverse supply chain consisting of a retailer and a supplier. The supply chain as a whole has strong incentive to reduce false failure returns because it can avoid much reprocessing cost associated. But typically, retailers enjoy a full credit provided by suppliers in case of returns, and hence they may not have sufficient incentives to exert enough effort for supply chain profit maximization. In some scenarios they may even have the motivation to actually encourage such returns. We suggest using a coordination contract to resolve such profit conflicts. The contract we propose is a quantity discount contract specifying a payment to the retailer with an amount exponentially decreasing in the number of false failure returns. We give explicit forms of such contracts given different assumptions about distribution of the number of returns and we also prove that such contract is capable of increasing both retailer's and supplier's profit simultaneously. Besides, when the contract is used together with other forward supply chain coordination contracts in a closed-loop chain, it is shown that it can act to deter retailer's potential incentive to encourage false failure returns. Moreover, some modifications of the contract may lead to easy allocation of incremental profit within the supply chain. © 2010 IEEE.