Modeling returns of merchandise in an inventory system

Returns of merchandise occur commonly in the retail and rental businesses. This paper presents a new continuous review (s,S) inventory system with returns. The system is fairly complicated as its performance is a function of important factors such as demand rate, return time, return rate and replenishment frequency. Based on a Markovian approach, we derive essential operating characteristics of the system, and propose an algorithm to search for the optimal replenishment parameters. The results enable us to obtain valuable insights into the rental system, such as the impact of partial returns.