Inventory management in a two‐echelon closed‐loop supply chain with correlated demands and returns

Reverse logistics or closed‐loop supply chains where product returns are integrated with traditional forward supply chains have been one of the major topics of research since about the last one and a half decades. In this paper, we address the inventory management issue in closed‐loop supply chains, and develop deterministic and stochastic models for a two‐echelon system with correlated demands and returns under generalized cost structures. In particular, we address the following questions – Do closed‐loop supply chains cost more than traditional forward supply chains? Does a higher rate of return always translate into lower demand variability and hence lower expected costs? What is the relationship between expected costs and correlations between demands and returns? Models developed and numerical examples shown in the paper reveal that although a higher rate of return and a higher correlation between demand and return reduce the variability of net demand, it may not necessarily lead to cost savings; rather the movement of costs will depend on the values of system parameters. We also quantify the cost savings in case the actual demand and return information is available at the time of decision‐making. We conclude the paper by providing managerial implications and directions for future research.