Omnichannel retail operations with refurbished consumer returns

Abstract

Online consumers being allowed to return unsatisfied products to any store prevails in the omnichannel retailing context. Retailers increasingly implement a store return option to offer consumers a seamless shopping experience. This paper develops a newsvendor model of a retailer selling its products to consumers through both online and offline channels. Consumers can return unsatisfied products to the retailer for a full refund, and the returned items can be resold as refurbished products in the circular economy era. Utilising the game theory, the retailer’s optimal ordering and pricing decisions are obtained under the benchmark scenario and omnichannel strategy. From the analytical results and numerical analysis, we examine the effects of implementing a store return option on the retailer under omnichannel retailing. The main results show that after implementing store return, (i) the optimal price of the new product remains unchanged, while the price of refurbished items may decrease in a certain condition; (ii) the optimal order quantity of the online channel increases, while that of the store decreases; (iii) in most conditions, store return strategy can achieve a win-win outcome. Specifically, consumers can enjoy more services without paying extra costs and retailer makes higher profit by implementing this strategy.

Keywords:

• Omnichannel retailing
• refurbished products
• store return
• closed-loop supply chain
• game theory

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1 https://www.apple.com/shop/refurbished/iphone/iphone-8-plus.

2 https://www.rsrresearch.com/research/omni-channel-2013-the-long-road-to-adoption.

3 Consumers are heterogeneous in the shopping channel. For various reasons, some consumers prefer to shop in stores, while others prefer to shop online. Like Dzyabura and Jagabathula (2017) and Zhang, Xu, and He (2018), we assume that the proportion of consumers buying online and in stores is $\alpha$ and $1-\alpha$, respectively. Under this premise, we model the utility of consumers who buy via different channels by using utility theory. For the consumer, as long as the utility of purchasing a product in a channel he likes is not negative, then he will choose to buy the product. Based on this feature, the retailer will determine the price of the product that is most beneficial to him. In other words, if the consumer utility in the segment with the lowest utility is zero, then the retailer can force all consumers (online and offline) to purchase the product. Therefore, we obtain the price of the product by comparing the utility purchasing online and offline ($U_o^n$ and $U_s^n$). The retailer faces two cases, i.e., $U_o^n\ge U_s^n$ and $U_o^n<U_s^n$. Specifically, if $U_o^n\ge U_s^n$, the retailer can get the first equilibrium priceof theproduct by letting $U_s^n=0$; on the other hand, the second optimal price can be derived by letting$U_o^n=0$.

Additional information

Funding

This work was supported by National Natural Science Foundation of China [grant number 71872075,71502076,71561018]; Hong Kong Postdoctoral Hub Programme: [grant number PiH/097/19]; Natural Science Foundation of Hunan Province[grant number 2019JJ50403].