The implications of pooled returns policies

When selling products with highly uncertain demands and short life cycles, it is common for a manufacturer to offer some form of returns policy to entice the distributors to increase their order quantities. In this paper we consider a multi-item returns policy called ‘pooled’ (or joint) returns policy under which the distributor can return any combination of the products up to R percent of the total purchases across all products. We analyze the distributor's optimal profit and order quantity under the pooled returns policy, and compare these operating characteristics to the case when a single-item ‘non-pooled’ returns policy is instituted. Under the non-pooled returns policy, the distributor can only return on individual items using item-specific return limits. We show an intuitive result that the distributor will always achieve a higher profit under the pooled policy. However, the manufacturer could actually obtain a lower profit under the pooled policy due to a counter-intuitive result: the distributor may order less under the pooled policy even though the pooled policy offers more flexibility. This counter-intuitive result motivates us to determine the conditions under which the distributor would order less under the pooled policy. Finally, we develop a heuristic for determining the distributor's optimal order quantities associated with the n-product case under the pooled policy.