Improving supply quality through the store-initiated returns in wholesale supply chains

Retail stores often offer a return policy. However, not all customers choose to return the product when they are not satisfied. To improve the store’s brand value and reputation, offering store-initiated returns (SIRs) is an innovative practice for retailers, especially warehouse stores. With SIRs, customers are notified by a store that they can return items for a refund regardless of their satisfaction status. In this study, we investigate how SIRs affect the quality decision and the supply chain partners’ profits and discuss how customers’ decisions affect the implementation. We formulate the problem as an inventory model with a single store and a single supplier. When the warehouse club has the power to utilize the SIR option, the supplier generally has a stronger incentive to supply items of higher quality. However, in some specific scenarios where customers are significantly more sensitive to product quality and with a higher product return rate, the supplier can adversely choose to supply products at a lower quality level to lower the cost. In terms of profit, we show that the warehouse club’s profit is usually higher when the ability to initiate the SIR is available. In contrast, the supplier always earns a lower profit when the SIR option is available to the wholesale club. To reduce the reverse logistic cost, we also investigated the costs and benefits of utilizing a gift card option instead of a passive cash refund. We find that when the expected cost of the items purchased with the gift card is lower than the total loss from the SIR, a feasible cost-sharing scheme always exists such that both the supplier and the store benefit from the gift card option. These results provide valuable insights into the potential benefits and issues that stores may face when implementing SIRs to improve customer satisfaction. It demonstrates the possibility of increasing product quantity and customer satisfaction with SIR strategy. •The store-initiated returns (SIRs) help manage potential satisfaction issues.•The supplier often has incentive to offer higher product quality with SIR.•With quality-sensitive customers, the product quality may decrease with SIR option.•The gift card option provides a possible cost-sharing scheme for the supply chain.