Abstract: With the increasing social competition,False Failure Returns policies are often adopted by retailers to increase market sales of products.The possibility of inventory transshipment among retailers was not considered in previous studies on supply chain coordination with False Failure Returns.But in reality, retailer inventory transfer strategy is often used in supply chain as a powerful coordination mechanism.In this paper, the retailer's transshipment strategy is introduced into the supply chain with False Failure Returns. Considering the effect of retailer's effort level on consumers' false failure returns rate, the supply chain coordination mechanism based on improved differentiated buy-back contract is studied.Focusing on False Failure Returns in a supply chain system composed of one supplier and the chain retail enterprises with two retailers.In random demand,assuming retail's effort levels are inversely proportional to false failure return rate and retailer transshipment are considered.A expected return model is presented to describe this problem. By comparing the order quantities of retails of centralized decision making system and distributed system,as well as the profits of the parties to make sure retailer's optimal quantities and effort levels.Improved differentiated buyback contract is proposed.Finally,Analysis of examples show that improved differentiated buyback contract can achieve supply chain coordination when parameters satisfy 74.06 ≤ λ ≤ 94.53,81.93 ≤ w ≤ 94.02. The research results of this paper can provide a reference for the supply chain coordination with False Failure Returns and income improvement between both sides of supply chain.

Key words: False Failure Returns, effort level, differentiated buyback contract, supply chain coordination