Abstract:False failure returns is especiallyserious for internet sales, the cost of a false failure returns is significantand incurred primarily by the manufacturer. However, reducing false failurereturns requires e-tailer’s service effort, such as detailed description,high-legible pictures, and perfect after-sales supports. However, there is lackof incentive for e-tailer to exert effort under the wholesale price-onlycontracts, which leads to the failure of supply chain coordination. In thispaper, we designed a discount punishment contract to coordinate the E-supplychain in order to reduce false failure returns, which gives the e-tailer adiscounted wholesale price at first, and charges penalty for each false failurereturns. This contract provides an incentive to the w-tailer to increase hereffort, thus decreasing the number of false failures and increasing net sales. Weshow that this contract can achieve channel coordination and a win-win outcome forboth manufacture and e-tailer.
Keywords:Supply chain coordination, False failurereturns, Internet sales, Supply chain contracts
INTRODUCTION
Over the last decades, internet sales havealready held a considerable share in total sales of commercial business. Throughinternet sales, the traditional distribution channels have been simplified, thee-tailer could sell directly to customers via internet. From the customers’point of view, internet purchase is advantageous since it frantically reducesthe search cost and convenient for them to shop from their home computer during24 hours per day 7 days a week.
Compare with classical sales, internet sales characterizedwith lots of returns, especially the false failure returns, which are productsthat are returned by consumers with no functional defect. There are severalreasons for false failure returns. First of all, driven by the “consumer isking” attitude, liberal return policies have been provided from the e-tailer. Secondly,according to the legislation in many countries, the customer has the right toreturn a product acquired through internet sales during a certain period. Thirdly,customers can not feel and try the product physically before making theirpurchase decisions via the internet sales. Consequently, the product oftenturns out to be different slightly from that shown on the internet. Lastly, itis easy to return products. After filling out a return form, the product can bereturned via mail. Some recent studies have shown that the return rates forinternet sales usually larger than 18% and can be as high as 74% for specificproducts [1].
When manufacturer receives a false failurereturns, the processing actions include testing, refurbishing (if necessary),repackaging, and rescaling. The cost of these actions is significant. Forexample, the per-unit cost of a false failure return for computermanufacturers, including HP, is around 25% of the product’s price [2].
In many settings, e-tailer’s service effort is beneficialto reduce the false failure returns. E-tailer may spend extra time tocommunicate with customers and understand their real needs. E-tailer may givemore detailed description and put more high-legible picture on the website tohelp consumers learn more about the product. After-sales support by thee-tailer may also reduce the number of false failure returns from customers whohave trouble configuring the new product.
E-tailer’s effort to reduce the false failurereturns may incur significant short-term cost, and the majority of the benefitsfrom reducing false failure returns have received by the manufacturer. Underwholesale price-only contract, e-tailer’s effort is less than the optimal levelto coordinate the supply chain, and then there is a need for contracts tocoordinate the supply chain.