The role of fourth party logistics as the reverse logistics integrator: Optimal pricing and return policies

Purpose – An effective return policy is used as an important competitive weapon in the marketplace to substantially influence product sales. However, return policy is also seen as a problem for all parties in the supply chain due to the headache in processing returned merchandise. While retailers are efficient in selling, they do not usually have the expertise in handling the reverse flow. The purpose of this paper is to propose the use of a fourth party logistics (4PL) as a return service provider, and develops optimal decision policies for both the seller and the 4PL. Design/methodology/approach – A profit-maximization model is presented to jointly obtain optimal policies for the seller and the 4PL through the use of Stackelberg like game theory, where the seller acts as the leader and the 4PL acts as the follower. Findings – Optimal values for the seller's and the 4PL's decisions are presented. Conditions under which profits for the seller and 4PL both increase are shown. Practical implications – This paper offers a number of managerial guidelines for using marketing and operational strategy variables to influence the market reaction parameters so as to obtain the maximum benefit from the market. Originality/value – This paper offers insights to seller and 4PL on how return policy may affect their strategic alliance. Treating return policy as a continuous variable is an original contribution of this paper as is the joint optimization of the seller and the 4PL.