Supply chain coordination for false failure returns (ed.3)

False failure returns are products that are returned by consumers to retailers with no functional orcosmetic defect. The cost of a false failure return includes the processing actions of testing,refurbishing if necessary, repackaging, the loss in value during the time the product spends in thereverse supply chain (a time that can exceed several months for many firms), and the loss in revenue because the product is sold at a discounted price. This cost is significant, and is incurred primarily bythe manufacturer. Reducing false failure returns, however, requires effort primarily by the retailer, forexample informing consumers about the exact product that best fits their needs. We address theproblem of reducing false failure returns via supply chain coordination methods. Specifically, we propose a target rebate contract that pays the retailer a specific dollar amount per each unit of falsefailure returns below a target. This target rebate provides an incentive to the retailer to increase hereffort, thus decreasing the number of false failures and (potentially) increasing net sales. We show thatthis contract is Pareto–improving in the majority of cases. Our results also indicate that the profitimprovement to both parties, and the supply chain, is substantial.