The impact of consumer returns on manufacturer's investments, returns policies and sales channel design

Many companies consider the flow of consumer returns to be a nuisance and a source of reduced profits. Returns of products to the point of sale are continuously increasing, and the costs associated with acquiring, shipping, inspecting, refurbishing, and remarketing returned products can reach unsustainable levels for both manufacturers and retailers. Further, the majority of products are returned not because of product failure but rather because of a mismatch with consumer taste and needs, which suggests that there are several countermeasures that can be taken to reduce the flow of returns.;In this work we take the perspective of a manufacturer and investigate how the manufacturer can reduce the negative impact of returns on his profits through investments, returns policies, and design of the sales channel. Investments to discourage consumers from returning the product are relevant because most of the products are returned not for reasons of product performance or quality but for difficulty in the installation, configuration, and use of the product. The examples of manufacturers, who are active in providing simple and easy to follow instructions and in making their products more intuitive to use, abound. Returns policies adopted by manufacturers with their retailers are an ideal instrument to induce retailer’s collaboration in product value recovery. Especially for products that are time-sensitive in nature, it is necessary that retailers actively engage in inspecting and refurbishing the returned products rather than sending them back to the manufacturer. Finally, through optimal design of the sales channel, the manufacturer can attract consumers towards the sales channel where returns have a lower impact on the manufacturer’s profits. While the online channel allows the manufacturer to provide consumers with a higher product value, for instance through product variety, availability, and customization, it poses the problem of uncertainty about product fit, which may trigger a product return. Investments, returns policies, and sales channel design are then three important tools for manufacturers to alleviate the negative impact of consumer returns on their profits. This work is articulated in four chapters and proposes practical rules for manufacturers to cope more efficiently with the problem of consumer returns.;Chapter 1 contains an introduction to the problem of consumer returns and gives a thorough review of the following three chapters.;Chapter 2 considers the problem of a manufacturer who is interested in having the retailer repackage and resell the products rather than send the products back to him. The manufacturer may take a costly hidden action to reduce the expected number of products returned by the consumer, but the returned products are privately observed by the retailer who has little incentive to engage in product recovery. We find that to discourage returns from the retailer the manufacturer should design an optimal returns policy which entails a full refund of the wholesale price for any returns, coupled with a bonus that is decreasing in the number of returns to the manufacturer.;Chapter 3 considers the inefficiencies in the product value recovery due to information asymmetry along the supply chain. We consider a manufacturer who faces consumer returns at the retail store and has to decide about a preventative investment before the new selling season starts, when the causes of returns are still uncertain. By the beginning of the selling season, the information about the causes of returns and thus about the effectiveness of the previous investment in reducing returns can be updated. We investigate how profits and investment are affected by the information held by retailer and manufacturer about the future product return rate. It is shown that when there is no or an asymmetric update of information about the product return rate, the manufacturer might opt for a less efficient product value recovery and, in some cases, he would forgo investing in the first place.;Finally, Chapter 4 considers the problem of the manufacturer to select the sales channel for his products. Through an online channel the manufacturer can offer higher product value to the consumer than through the traditional retail channel, mainly because of product variety, availability and customization. However, there might be uncertainty about product fit and the manufacturer has to strategically control, through prices and a returns policy, the flow of consumers buying his product through the online channel vs. the retail channel. We find that when consumers prefer purchasing at the retail store, the manufacturer might decide to open anyway an online channel but just to induce the retailer to lower the selling price, thus boosting manufacturer’s demand and profits. When the salvage value that can be extracted from returns is sufficiently high, the manufacturer offers his products through both the retail and the online channel. Further, the manufacturer will adopt a liberal returns policy because in this way he can lead some of the consumers to switch towards an online purchase, which would alleviate the inefficiencies due to double marginalization occurring at the retail channel.