Optimal decisions of modularity, prices and return policy in a dual-channel supply chain under mass customization

Online customization is very popular among consumers in current e-commerce because of its flexible customization time and diverse product attributes. This paper establishes a dual-channel supply chain composed of one manufacturer and one retailer under mass customization. The manufacturer sells standard products offline via the retailer when providing modular customized products online. Two online distribution strategies of the manufacturer are considered: The manufacturer can choose direct or agency sales through the retailer’s online channel. Additionally, the return policy of modular customized products available online is explored. A Stackelberg game model is proposed under each return scenario (with and without online consumer returns) to derive the optimal solutions for different channel strategies. Then, the influence of different parameters on the optimal modularity level and product prices is investigated under each model. Through sensitivity analysis, we found that the cross-price sensitivity coefficient of dual channels has a considerably positive impact on optimal decisions. Furthermore, the manufacturer’s channel strategy and return policy decisions are examined. The result indicates that direct sales should be chosen if manufacturers’ online channel operating costs are lower than a certain threshold that increases with the revenue allocation ratio under agency sales. When the market demand of the product that is allowed to be returned is much more sensitive to the refund than its return quantity, a full refund policy should be offered for online customized products. These conclusions also apply to the return scenario where full refunds are provided for both standard and customized products. • A two-level dual-channel supply chain under mass customization is studied. • Optimal modularity and pricing decisions are analyzed under a Stackelberg game model. • The manufacturer’s channel strategy and return policy decisions are examined. • Manufacturer prefers direct sales if its e-channel operating cost is sufficiently low. • Return policy depends on the sensitivity of demand and return quantity to the refund.