400 million more packages are expected to move in reverse this year than last year as consumers continue to shift the store fitting room to their homes. As online shopping continues to grow by double digits, so too will the reverse flow. With roughly 67% of consumers looking at a retailer or consumer brand’s return policy prior to shopping online, making returns free and easy is a critical step in building brand loyalty.
Returns management has suddenly become a critical area of focus to cut costs and improve customer retention. Effective returns management consists of far more than simply refunding consumers their money. However, depending on a 3PL who knows less than you about your product, your brand and your returns, is not the answer.
Returns are a huge driver in e-commerce profitability or the lack there of, especially compared to traditional store sales. Online return rates generally range from 25-45% and are even greater for some apparel and footwear categories. The economics of e-commerce (direct-to-consumer fulfillment) combined with returns creates a dilemma for the industry. Unlike traditional store operations that are driven by fixed costs (more traffic, more profits), e-commerce and its associated returns are basically all variable cost, meaning economies are limited. Further, the economics of returns makes outsourcing to a 3PL difficult since pricing models are not supportive.
Unlike forward fulfillment, returns management is an exercise in chaotic processing. There are no defined orders to fulfill and no defined purchase orders to receive against. A return authorization (RA) may or may not be generated. Even if an RA does exist, the product may or may not arrive. Once a returned product arrives, the contents of the package must be processed and tracked at the individual unit level. Each item must be received, inspected and condition assigned. The item may or may not match the expected product, and the product may or may not still be in-season.
Regardless of these challenges, the optimal path must be selected from all of the many possible disposition paths. The path for each unit may differ based on condition and can include sending back to stock, returning to vendor, or selling as open box / shop worn, on secondary markets. All of this activity must be directed upon first touch in order to facilitate timely and cost-effective handling.
In short, returns management has to juggle multiple paths for the same SKU, depending on time of year, resale value and product condition.
Returns Management – establishing consistency out of chaos
With the sharp increase in packages moving in reverse, traditional approaches to supply chain operations are just not enough. Returns Management requires fresh and creative new thinking. It requires embracing advanced predicative analytics, layered with machine learning. And, it requires speed of processing at the unit level.
An example of a simple solution that is growing in popularity is co-locating reverse operations within forward fulfillment facilities. Why? Co-location facilitates easier flow of resalable goods back into forward fulfillment inventory that can support online sales or go back to store. The best possible outcome for returned product is for it to be returned back into the sale channel at the point of return. Thus, co-location reduces both the cost and time associated with back-to-stock. By co-locating, you are giving yourself the highest probability of reselling the returned product at the highest possible retail price.
Despite the growing flow of returns, many continue to push returns management off to the side opting instead to focus on upfront customer engagement. However, a focused returns management strategy can deliver substantial cost savings along with a lift in sales revenue.
As we approach peak holiday season, how ready are you for the returns that will follow? How well do you understand what drives returns? How confident are you that you understand the true cost of a return?
Over the next few weeks, we will be releasing additional posts that will focus on these very questions. We look forward to hearing your thoughts.
Associate Partner, Infosys Consulting
Sylvie is a passionate and results-oriented supply chain executive. Her experience with supply chain start-ups has demonstrated to her that supply chain professionals must question the status quo in order to deliver next-generation solutions. She is a believer in hands-on experimentation in order to deliver maximum results. Sylvie has developed and implemented numerous supply chain transformation initiatives for her clients and has extensive experience working with leading retailers and consumer brand owners. A supporter of lifelong learning, she continues to seek out fresh and innovative new ideas and insights through a network of supply change thought leaders. She is also giving back to the field as a guest lecturer at the University of Maryland.