________________________________________ * : Corresponding author. Tel.: +81 82 424 7705 Alternative e-mail: erwin@ie.its.ac.id Managing sales return in dual sales channel: An analysis of its product substitution Erwin Widodo 1αβ* , Katsuhiko Takahashi 2α , Katsumi Morikawa 3α , I Nyoman Pujawan 4β , and Budi Santosa 5β Graduate School of Engineering, Artificial Complex Systems Engineering Department, Hiroshima University, Higashi-Hiroshima, 739-8527, Japan α Department of Industrial Engineering, Sepuluh Nopember Institute of Technology, Surabaya, 60111, Indonesia β e-mail: erwinwidodo@hiroshima-u.ac.jp 1 , takahasi@hiroshima-u.ac.jp 2 , mkatsumi@hiroshima-u.ac.jp 3 , pujawan@ie.its.ac.id 4 , budi_s@ie.its.ac.id 5 Abstract. A number of works have been dedicated to exploit dual sales channel (hereinafter, referred to as DSC), i.e. channel structure for selling a product through conventional store and online facility simultaneously. However the issue of managing sales-return for its online-transaction in this area still needs further investigation since its mismanagement may threaten the whole channel’s profitability. In responding to this issue, two models describing DSC structure altogether with return mechanism is composed. The first model, namely benchmark model, is composed based on a concept of considering sales returns as lost-sales. To defy this model, an online facility return model, which represents the availability of DSC chain to substitute online customer’s return for better conformity, is also constructed. By comparing considered decision variables which provide the optimum value of total or partial profit within these two models under Bertrand and Stackelberg leader schemes, some fruitful and beneficial insights for managing DSC with its return functionality are gained. Leaning on this outcome, DSC managers will have a reliable theoretical grip in determining their DSC with consideration on sales return decisions. Keywords: Dual sales channel, sales return, product substitution. 1. INTRODUCTION The internet has been significantly influencing how supply chain players do their business. Changes have taken place in the way of forecasting, procurement, production, inventory control, and distribution by mean of the existence of the internet. Amongst them, it seems that distribution activity is a challenging area since it is directly adjacent to customers. This condition forces managements to keep on seeking efficient breakthrough for overcoming their situational problems by taking benefit of the internet power. Recently, one particular concept that has increasingly become popular is embodying conventional distribution structure with internet-based (online) order fulfillment system. There are some authors who verbalize this concept into dual sales channel (DSC in short) structure (Chiang et al. 2003; Bendoly 2004; Chiang and Monahan 2005; Kumar and Ruan 2006; Bendoly et al. 2007; Chen et al. 2008). Even though not in an excessively great number, some previous works have successfully contributed to the expansion of DSC research stream. Basically, they can be divided into two groups. First, a group of works that are focused on developing analytical models to capture a specific dual-channel-structure characteristics in which algorithms are proposed or modified from the previously existed ones (Bendoly 2004; Tsay et al. 2004; Chiang and Monahan 2005; Kumar and Ruan 2006; Yue and Liu 2006; Bendoly et al. 2007; Chen et al. 2008; Cai et al. 2009; Mahar et al. 2009). The second group represents works that deal with frameworks, conceptual models or idea in managing in-store demand and online demand fulfillment simultaneously (Mols 2000; Gabrielsson et al. 2002; Steinfield et al. 2002). Beside these achievements, however, opportunities are still widely open especially in the former group of work. An example of not-yet-explored area within those aforementioned papers is sales return management in DSC. Hence, how to embed sales return management to DSC domain will become very interesting question to address. To the best of our knowledge there is still no paper considers such kind of idea. APIEMS2009 Dec. 14-16, Kitakyushu 823