Optimal Design of Customer Returns Policy and its Impact on Supply Chain

Product returns have become a major challenge in the retail industry, as they are both significant and costly; the average customer returns rate is 8.9% and the monetary value of returns was $28 billion in 2013 in Canada. Return rates of some fashion items can be as high as 74%. Research, however, shows that only about 5% of customer returns are due to defects. Customer returns policies range from “100% Money Back Guarantees” to “no refunds.” They influence customers' purchase and returns decisions as well as retailers' pricing and order decisions, and thus impact the performance and profitability of supply chains. The return, processing, resale, reuse, and/or disposal of products also have environmental and social consequences, and are therefore critical to supply chain sustainability.***Customer returns have recently attracted much attention in both academia and practice. Studies of the design of optimal customer returns policy structures and their impact on supply chains, however, are rather limited. Through my explorations over the past several years, I have identified significant research gaps related to customer returns, and I propose to elucidate: 1) a more accurate customer returns model, incorporating customer valuations prior to and after purchase, and the associated optimal customer returns policy; 2) customized and dynamic returns policies, offering different policies to different customers and in different time periods; 3) optimal design of customer returns policy in conjunction with inventory and pricing decisions when supply chain members face competition; 4) integration of a manufacturer's buyback policy and retailers' customer returns policies in the multi-channel supply chain; and 5) impact of the optimal customer returns policy design on supply chain sustainability. These will be done through mathematical modelling, using quantitative methods, such as optimization and game theory.***The proposed research quantifies factors of economic and environmental significance associated with product returns, and mitigates the negative impact of customer returns through optimal design of customer returns policies. The research program proposed is novel and innovative in considering factors and issues either not discussed or newly emerging in the existing literature on design of optimal returns policy: change of customers' prior and posterior values, supply chain competition and sustainability, customized and dynamic customer returns policies, and integration with buyback policies. The research program provides strategic opportunities for supply chain members to be more efficient and sustainable through the design of optimal returns policies. It will also benefit both academia and industry, by filling significant gaps in knowledge, providing opportunities to train future researchers, and helping Canadian companies compete in an increasingly complex global economy.***