Using returns policies to coordinate the supply chain with a utility risk measure retailer

Abstract

Returns polices is an effective mechanism in supply chain coordination. However, whether or not it works when participants of the supply chain have their own preferences on the risk is an important research issue. This paper investigates this kind of issue: The retailer faces a risk preference measured by the exponential utility function and the supplier as a Stackelberg leader provides a returns policy contract for that retailer. The retailer then decides to place an order from the supplier according to his risk preference and random market demand. We assume that the supplier known the retailer's market information and its risk preference. Under this condition, we analyze the coordination of the returns policies in different environment of supply chain. The result of this paper can complement the supply chain coordination research literature considering decision-maker's risk attitude, and also be effective to support decision-maker to set incentive mechanisms or respond to the incentives.