Optimization of a Dual-Channel Retailing System with Customer Returns
Abstract
A plethora of retailers have begun to embrace a dual-channel retailing strategy wherein items are provided to consumers through both an online store and a physical store. As a result of standards and competitive measures, many retailers provide buyers who are unhappy with their purchases with the ability to achieve a full refund. In a dualchannel retailing system, full reimbursements can be done through what is called a crosschannel return, when a buyer purchases a product from an online store and returns it to a physical store. They can also be done through what is called a same-channel return, when a buyer purchases a product from a physical store and returns it back to the physical store, or purchases a product from an online store and returns it back to the online store. No existing research has examined all common types of customer returns in the context of a dual-channel retailing system. Be notified that the practice of cross-returning an item purchased from the physical store back to the online store is not common. Thus, it is not considered in this dissertation.
We first study the optimal pricing policies for a centralized and decentralized dual-channel retailer (DCR) with same- and cross-channel returns. We consider two factors: the dual-channel retailer’s performance under centralization with unified and differential pricing schemes, and the dual-channel retailer’s performance under decentralization with the Stackelberg and Nash games. How dual-channel pricing behaviour is impacted by customer preference and rates of customer returns is discussed. In this study, a channel’s sales requests is a linear function of a channel’s own pricing strategy and a cross-channel’s pricing strategy.
The second problem is an extension of the first problem. The optimal pricing policies and online channel’s responsiveness level for a centralized and decentralized dual-channel retailer with same- and cross-channel returns are studied. Indeed, the online store is normally the distribution centre of the enterprise and is not limited to the customers in its neighbourhood. Also, the online store experiences a much higher return rate compared to the physical store. Thus, it has the capability and the need to optimize its responsiveness to customer returns along with its pricing strategy. A channel’s sales requests, in the second problem, is a linear function of a channel’s own price, a crosschannel’s price, and the online store’s responsiveness level.
The third problem studies the dilemma of whether or not to allow unsatisfactory online purchases to be cross-returned to the physical store. If not properly considered, those returns may create havoc to the system and a retailer might overestimate or underestimate a channel’s order quantity. Therefore, we study and compare between four vi different strategies, and propose models to determine optimal order quantities for each strategy when a dual-channel retailer offers both same and cross-channel returns. Several decision making insights on choosing between the different cross-channel return strategies and some properties of the optimal solutions are presented.
From the retailer’s perspective of outsourcing the e-channel’s management to a third party logistics and service provider, we finally study three different inventory strategies, namely transaction-based fee, flat-based fee, and gain sharing. For each strategy, we find both channels’ optimal inventory policies and expected profits. The performances of the different strategies are compared and the managerial insights are given using analytical and numerical analysis.
Methodologies, insights, comparative analysis, and computational results are delivered in this dissertation for the above aforementioned problems.