Optimal Collection Policies for Multiple Returned Products and Multiple Return Centers

Abstract Product returns are an essential part of conducting business today due to the emergence of e-commerce and the proliferation of generous return policies. Such policies, however, can backfire due to their costly operations and unpredictability. To minimize the adverse impact, we develop and compare different collection policies to reduce the total inventory and transportation costs in a three-echelon network consisting of (a) customers returning products to initial collection points (ICPs), (b) the ICPs, and (c) the centralized return centers (CRCs) that receive the products shipped from the ICPs after they are aggregated into larger shipments to leverage economies of scale. Collection policies are designed for the case of multiple products with a single ICP and multiple CRCs by using (1) an individual shipment policy where ICPs ship out products to individual CRCs and (2) a combined shipment policy that allows shipping and routing from an ICP to multiple CRCs. Mathematical models are constructed to determine the collection period at the ICPs to minimize the total inventory and transportation costs for these policies. The mathematical properties of the cost functions are established and exploited to develop efficient optimization algorithms. Using an experimental dataset, numerical results are presented that illustrate the algorithms and provide insights into the tradeoff between the inventory and transportation costs in designing collection policies for managing product returns.