Optimal operational strategies for online retailers with demand and return uncertainty

Online retailers incur added costs to receive returned products from customers compared to their traditional brick and mortar counterparts. When a product is returned to an online retailer, the return shipping cost often falls upon the retailer. Our paper analyzes the optimal operational strategy for an online retailer that offers a “guaranteed return” policy to their customers. Under the guaranteed return policy, the retailer accepts all returns from customers and covers all of shipping costs incurred. The model is further extended to analyze the retailer’s operational problem of re-selling returned products. For the secondary market, under the re-selling strategy policy, the retailer does not accept returns and the product is sold “as-is”. The added profits the retailer generates from employing the re-selling strategy is quantified. Our model provides the threshold prices required for the retailer to sell the product for different operational strategies that are employed. Furthermore, we provide the optimal order quantity for a retailer who operates under demand uncertainty and return uncertainty. The optimal order quantity for a retailer who employs the re-selling strategy differs from a retailer who does not employ the re-selling strategy. At lower product price points, the retailer who does not employ the re-selling strategy orders more units than a retailer who does employ the re-selling strategy. Once the price point exceeds a threshold, the opposite is true.