Order and Pricing Decisions with Return and Buyback Policies

Abstract

This paper considers application of return and buyback policies in a supply chain system. The system contains a manufacturer and a retailer. The manufacturer produces and sells a single product to the retailer and promise to buy back all the remaining units from the retailer at the end of the selling season. The retailer orders from the manufacturer before the season and applies a return policy to its customers with full refund. Customer demand is assumed to be sensitive to the retail price. Before the beginning of the selling season, the manufacturer offers the wholesale price and the buyback to the retailer. The retailer then determines the order quantity and the retailer price. Two types of control are investigated. Under decentralized sequentially decision making, both the manufacturer and the retailer make their decisions to maximize their own profit. Under centralized control, all the decisions are jointly made to maximize the profit of the whole system. Mathematical models under the two types of control are constructed and optimal order and pricing decisions are derived. The optimal decisions and the resulting profits are compared. We show that centralized control always generates higher overall profit.