517 / 2024-04-25 18:33:47

Who and When to Provide Return Shipping Insurance in Supply Chains?

consumer fit uncertainty; retailer insurance; third-party insurance; competition; supply chain

To alleviate online shoppers' concern regarding returns, firms have initiated to provide return shipping insurance (RSI), entitling insured consumers to shipping unfit products back for free. In practice, RSI can be provided by either retailers (retailer insurance) or third-party insurers (third-party insurance). Based on a complete analysis of all profiles of RSI policies, we investigate who and when to provide RSI and to whom RSI should be offered, and examine the roles of different RSI policies in influencing supply chain performances. We reveal that RSI, provided by either the retailer or the third-party insurer, can be an efficient tool to improve profits for individual firms and the supply chain. Moreover, whether retailers should provide RSI by themselves or leverage third-party insurers to cover return shipping costs depends on three factors: the demand expansion effect of RSI, the game behavior among supply chain members, and the retailer's capability of coordinating insurance premium and retail price. The retailer prefers the third-party insurer to provide RSI when the third-party insurer offers a low insurance premium.  Interestingly, competition arising from third-party insurance in the context of retailer insurance can actually benefit the retailer and the supply chain. Furthermore, we explore three extensions and generate additional insights. First, when the return shipping costs are different for the retailer and consumers, we show that, even for small retailers who face a shipping cost higher than consumers, retailer insurance can still generate higher profits for the retailer and supply chain than having no insurance. Second, the design of insurance policy depends on which party, the retailer or the supplier, salvages returned products. Third, our findings suggest that insurances with return shipping cost split between the retailer and supplier can improve profits for individual firms and the supply chain.