Abstract：In the manufacturer-TPL supply chain, manufactureroutsourcedthereverse logistics works to a TPL. The quicker TPL transport the product returns, the less of theinvalid returns. Under the simple piece-rate contract, TPL makes thetransportation decision to maximize his own expected profit. The equilibriumtransportation speed under such contract is slower than the supply chain’soptimal speed. In this paper, we introduce a punishment mechanism into thepiece-rate contract, which not only pay for transported returns, but alsopunish for the invalid returns. We show that this contract can achieve channelcoordination and a win-win outcome for both manufacture and TPL.

Keywords：Supply chain coordination;Supply chain contracts; Rapidtransportation; Product  returns

I. Introduction

As the growing of volume and treatment cost forproduct returns, if the manufacturers choose to collect, transport and recyclethe returns independently, such reverse logistics works will cost them a lot. Forthe SMEs (small and medium enterprises), their strength are not strong enoughto invest the construction of reverse logistics system, so required tooutsource their reverse logistics works; while for large enterprises, in theface of increasing market competition, they need to invest their limitedresources on the development of core competence, and outsource their reverselogistics works. Therefore, because of the resources’ limitation, whether largeenterprises or SMEs, most of them must outsource the operation of reverselogistics to a third party logistics providers in the face of increasing numberof returned products. The studies of Meyer (1999) and Rosen (2001) have shownthat, with the increasing importance and complication of reverse logistics, lotsof companies can not deal with this complex network, and choose to outsource reverselogistics. Such as, many companies use NetReturn and the Federal Internetsystem to manage their reverse logistics operation. Lieb (2000) found that most(91%) major third-party logistics providers have taken reverse logisticsservices as their main product. Such as Federal Express and Astra, thosethird-party companies not only collect and transport the product returns, butalso collecting the information from consumer as well as tracking the situationof returned products.

Outsourcing reverse logistics for product returns meansthe third-party logistics providers undertake part or all reverse logistics operations.

In this paper, manufacturers will outsource thecollection and transportation of the returned products, and pay the third-partyprovider’ services according to a contract. The third-party provider willtransport the collected product to manufacturer in a fixed time interval, whilethe manufacturer will remanufacture the returns and sale the remanufacturedproduct as new product in the market. Over the product life cycle, the productprice show a gradual downward trend, the market demand at the end of the lifecycle is zero, and remanufactured products lost the possibility of sales.Therefore, the slower processing speed of returns, the more loss for productvalue. Guide and Van Wassenhove (2003)’s survey found that most companies didnot treat product returns as their core "value creation" business. Suchnegative viewpoint for returns will postpones the treatment, and result in muchloss of product value, especially for the rapid growing industries.