Consumer returns in consignment contracts with inventory control and additive uncertainty

Abstract Consignment is a form of business arrangement, in which a vendor places goods at a retailer’s location without receiving payment until the products are sold. This paper examines consignment with consumer non-defective returns behaviour, where the upstream vendor makes a contract with the downstream retailer. The vendor decides what the consignment and refund prices are, and the retailer chooses the retail price. The vendor gets paid based on the sold units, salvages and returns. We analyze two contracts, called retailer and vendor managed consignment inventory (RMCI and VMCI, respectively), the only difference being that under RMCI, the retailer chooses the service level, and under VMCI, the vendor specifies it. We present precise solutions to VMCI for additive uncertainty and compare them to the multiplicative case. We prove that the vendor’s optimal return policy depends on a salvage value since if it is equal to zero, the vendor should not offer the return policy. We show that the channel may gain profit from the return policy for the positive salvage value. We demonstrate that the form of uncertainty and the presence of consumer returns considerably affect the solutions to the problems. As an extension, we give the results obtained under RMCI.