Abstract：Retailer’s effort for quality information collectionand feedback is especially serious for product quality improving. The moreeffort, the quicker quality improving, the less defective returns in theproduct life cycle. In the decentralized supply chain, there is lack ofincentive for retailer to exert more effort, which leads to the failure ofsupply chain coordination. In this paper, we designed a transfer payment - punishmentcontract to coordinate the supply chain in order to reduce defective returns, which committed to transferretailer a payment at theproduct’ market entry stage for effort cost compensation, andcharges penalty for each defective returnat the end of product life cycle, the punishmentwill been deducted from the committed transfer payment. This contract provides an incentive to the retailer to increase hiseffort, thus decreasing thenumber of defective returns in the product life cycle. We show that thiscontract can achieve channel coordination and a win-win outcome for bothmanufacture and retailer.

Keywords：Supply chain coordination;Quality improving; Defective returns; Supply chain contracts

I. Introduction(Heading 1)

Over thelast decades, the flow of product returns has becoming a significant concernfor many manufacturers and their distributors. A study has found that theaverage return rate for these new businesses is about 25% [1]. In addition, inorder to attract more customers, liberal return policies have been provided bythe retailers, which lead to much more returns. The average consumer returnrate range form 5%-9% of sales for most retailers and up to 35% for fashion apparel^[2]. Among these returns, there are defective returns andnon-defective returns. Not considering the damaged products in thetransportation process, the defective returns are produced by the qualityproblem in the designing or manufacturing process.

In themarket entry and develop period, the performance of product quality is in theunstable phase, it always accompanied by a large number of defective returns.Collecting the quality information from returns is helpful for company toimprove its design, production processes, and packaging et al., which willgradually improve the product quality, and ultimately makes the product returnsat a stable and lower level.

Afterconsumers found that the product have quality problem, they will feedback the qualityinformation to retailers through return products in the first time. Theinformation’ collection and follow-up feedback requires retailers’ effort. Theretailer’s effort will affect the feedback speed of information. The moreeffort the retailer’ exert, the quicker speed the information feedback, andalso the quicker speed of quality improving. Product quality’ quick improvingwill enable the return rate enter the stable and lower stage more quickly,which reduce the volume of returns in the whole life cycle. Figure 1 shows howthe information’ feedback speed impacts the product’s return rate.