Coordinating a decentralized supply chain with customer returns and price-dependent stochastic demand using a buyback policy

We investigate a decentralized supply chain that consists of a manufacturer and a retailer where the retailer simultaneously determines the retail price and order quantity while experiencing customer returns and price dependent stochastic demand. We propose an agreement between the manufacturer and the retailer that includes two buyback prices, one for unsold inventory and a second for customer returns, and show that this type of easy-to-implement agreement can achieve perfect supply chain coordination and be a win-win for both manufacturer and retailer when a complementary profit-sharing agreement is included. (C) 2011 Elsevier B.V. All rights reserved.