A profit maximization for a reverse logistics dual-channel supply chain with a return policy Raaid Batarfi ⇑ , Mohamad Y. Jaber, Salem M. Aljazzar Department of Mechanical and Industrial Engineering, Ryerson University, Toronto, Ontario M5B 2K3, Canada article info Article history: Received 6 July 2016 Received in revised form 15 November 2016 Accepted 25 January 2017 Available online 1 February 2017 Keywords: Supply chain Reverse logistics Dual-channel Return policy Customization Refurbish abstract In the last few decades, the rapid development of e-commerce technologies has encouraged many man- ufacturers to adopt an online channel in addition to their existing traditional retail channel, which resulted in redesigning their supply chain channel structure. Additionally, an increasing number of man- ufacturers nowadays offer a return policy to attract more customers and to stay competitive. This paper studies a supply chain system, which is comprised of production, refurbishing, collection, and waste dis- posal processes. A return policy in which customers can return the purchased item for a refund is also considered. Two selling strategies, a single-channel strategy (i.e., a retail channel) and a dual-channel (i.e., a retail channel and an online channel) strategy are discussed from which mathematical models are developed. The purpose is to examine the effect of different return policies on the behavior of SC sys- tems before and after adopting the dual-channel. In both strategies, the paper analyzes the change in the profit, the pricing and inventory decisions. Numerical examples and sensitivity analyses are provided with their results discussed. The findings of this paper demonstrate that in both strategies, the more gen- erous the return policy is, the higher the demand, the selling prices and the overall profit. The findings also indicate that adopting a dual-channel strategy is more profitable to the supply chain. Ó 2017 Elsevier Ltd. All rights reserved. 1. Introduction The last few decades witnessed remarkable changes in the busi- ness world. One of these changes is the emergence of the internet and e-commerce technologies. It was forecast that the direct online sales in the United States and Canada, will reach US$500 billion by 2018 (Retail Sales Worldwide Will Top $22 Trillion This Year - eMarketer, 2014). This growing size of the e-marketplace is promising; therefore, many manufacturers have been motivated to redesign their supply chain (SC) channel distribution through the adoption of an online channel in addition to their existing tra- ditional retail channel (Yao, Yue, Wang, & Liu, 2005). For example, companies such as Apple, Dell, hp and IBM have adopted an online channel in addition to their traditional retail channels (Tsay & Agrawal, 2004). This has also allowed many manufacturers to be more interactive with customers, understand their needs and deli- ver products that meet the specification of each customer’s requirements (i.e., mass-customized items) (Liu, Choi, Yuen, & Ng, 2012; Mukhopadhyay & Setoputro, 2004). Mass customization (MC) is an industrial system practice, trig- gered by advances in e-commerce, information technologies (IT), flexible manufacturing system (FMS) and computer-aided design/- manufacturing (CAD/CAM) to produce a wide range of customized products or services at a cost that is close (but higher) to that of a mass produced item (Batarfi, Jaber, & Zanoni, 2016; Liu et al., 2012). In practice, successful MC builds products from combining preassembled components, which the literature refers to as built- to-order (BTO). Most manufacturers that offer customized items do not consider offering it as an isolated business strategy, but alongside an existing standardized production strategy (e.g. Dell, Apple and Nike). The motivation behind this is to enrich the capa- bility portfolio of the manufacturer, which will increase their mar- ket share and improve their profit. However, implementing MC as a new method would require the adoption of a dual-channel strat- egy. However, with the adoption of a dual-channel strategy, the problem of managing the inventory of the SC becomes more com- plex in which the online channel may cause difficulties that could cannibalize the retailer’s market share and impact the inventory decisions (Takahashi, Aoi, Hirotani, & Morikawa, 2011). Firms that adopt a dual-channel strategy may be required to redesign their SC structure and, accordingly, determine their pricing strategy and their inventory policy decisions. Another challenge to firms is product returns. Offering a return policy, in which customers can return the purchased items for a refund, has been used as an important marketing tool and a com- http://dx.doi.org/10.1016/j.cie.2017.01.024 0360-8352/Ó 2017 Elsevier Ltd. All rights reserved. ⇑ Corresponding author. E-mail addresses: raaid.batarfi@ryerson.ca, raaid.batarfi@gmail.com (R. Batarfi). Computers & Industrial Engineering 106 (2017) 58–82 Contents lists available at ScienceDirect Computers & Industrial Engineering journal homepage: www.elsevier.com/locate/caie