Returns - Retails Achilles Heel

Returns are a Pandora’s Box for retailers

The returns process can be like opening a Pandora’s Box of problems for a retailer.

As a retailer, you’re trying to do everything right to lure in shoppers through online retailing. You offer free shipping. Customers can return goods to a retail location. You even offer free returns through the post, but this freedom for the customer can mean a lot of headaches and cost for you. The demands of the omnichannel marketplace are not only changing the way companies fulfill orders but how they engineer reverse logistics processes. While you need to please the customer, you also need to be profitable.

Online returns continue to be a major issue for many retailers across the world. According to Supply Chain Dive, about 10% of all goods sold in the US in 2018 were returned. The numbers vary by country and industry but in some locations, returns are as high as 60 percent.

Many retailers manage the return of goods as a cost-recovery exercise, rather than adapting their processes to take into account customers’ ever-changing buying habits. In the same way that today’s omnichannel environment is allowing consumers to buy items where and when they want, it is clear they would like the same flexibility when it comes to returns. For many retailers, product returns are a missed opportunity to enhance the customer experience and differentiate them from the competition.

The customer is always right

Online retail has changed the way people shop. Consumers are now buying multiple items rather than one or two, with the intention of sending some back; especially in fashion retail where multiple sizes are often bought. These customers still expect a high level of service in the returns and, if they are dealt with in an effective and customer-friendly manner, they are more likely to spend again with that retailer.

In today’s omnichannel environment, customers are making more demands on how they return products. This means returning a wider variety of goods from any number of locations determined by the customer, including but not limited to: the home, the office, the post office, drop off point, or local retail store.

Through linking delivery management to Customer Relationship Management data, retailers can begin to offer a more personalised returns experience to their customers to foster brand loyalty. This could take the form of a certain number of free deliveries throughout the year, or more precise collection windows. Retailers can also engage with customers by giving more free returns to customers that spend more. Being flexible over return options can be a good way to demonstrate value and reward loyalty over the festive period, for example, when customers will purchase gifts weeks before they give them to the intended recipients.

Product returns can also form a valuable part of the customer journey. They provide a way for the retailer to re-engage with dissatisfied customers, by offering discounts and targeted offers to show the customer how valuable they are. Ensuring a consistent user experience can help meet the returns requirements of all customers locally and internationally, irrespective of geography or carriers used.

Supply chain woes for retailers

Whatever the reason that an item gets returned, this is where the problems start for the retailer; and more specifically their supply chain.  

The product could have been returned because it was damaged or faulty in some way. It could be because it wasn’t what the consumer expected. It could be it wasn’t the right colour. It could even be, taking the cynical view, that free delivery was achieved by purchasing a certain value of goods and the consumer added the product to their basket to push them over the minimum spend threshold.

Whatever the reason that a product is returned, the retailer now has an issue. It has a product that it doesn’t necessarily want and it has an additional customer service issue that it needs to deal with.

Taking the customer service issue onboard, if dealt with in the right way not only can the business enhance their reputation with the consumer but this can also build brand loyalty. If dealt with in the wrong way they could lose a customer and possibly more if the customer takes it upon themselves to use word of mouth and social media to express their dissatisfaction with the organisation.

From a supply chain and logistics point of view, how does the company deal with a product that is returned? In most cases, this will fall within the realms of reverse logistics which refers to the life-cycle of your products after they arrive at the end consumer.

Reverse logistics is like cleaning up the morning after a big party – a mess that no one really wants to face, resulting from things that are leftover or ill-used from the day before.

The notion of reverse logistics isn’t new of course. The function has been around since the Phoenicians began shipping amphorae of wine to Rome in 1500 BC.

Hopefully, processes have moved on since then but reverse logistics is the conundrum that every company will face at one time or another and how it deals with this issue will determine whether it is an opportunity or threat to the business.

The graphic above illustrates the typical life-cycle of a product from the industry/manufacturer through the distributor to the retailer and to the end-user. Reverse logistics deals with the journey of the product from the end-user back to the distributor and onwards to being put back into stock, being recycled, being repaired or something else.

Reverse logistics can represent a significant chunk of supply chain cost, and it’s typically not very well managed. Estimates range from 1 percent of over overall supply chain cost for a well-managed operation to almost 10 percent where the returns process requires improvement.

Typically reverse logistics can drastically add cost to an operation through increased transportation costs, moving the product from the consumer back into the supply chain, and in warehouse costs, through additional labour resource required.

The 4 Rs of integrated returns management

The other area where significant additional cost can be incurred by a retailer is in what has been termed the 4 Rs of integrated returns management — recovery, reconciliation, repair, and recycling.

(1) Recovery — it’s important to be able to recover the products to the correct location as soon as possible in order to be able to maintain, oversee and monitor product reliability as well as control inventory levels;

(2) Reconciliation — once a product is returned it needs to be assessed in terms of another 4 Rs – repair, restock, refurbish or recycle – which enables the company to determine which supply chain the returned product should follow. A large percentage of returned goods can be returned to stock and thus increases inventory;

(3) Repair — if the returned product can be repaired then it is time critical to facilitate the repair and ensure the product is returned to the consumer. It could also be possible that a product is either repaired at the distribution centre and returned to stock in cases when perhaps packaging can be re-instated or even sold on to a re-seller who will be able to repair the product and sell as refurbished;

(4) Recycling — Government enforcement of proper handling standards for used and obsolete electronic products is increasing globally — e.g., the WEEE (Waste Electrical and Electronic Equipment) regulations being put into place in the European Union. Companies to ensure that they adhere to these standards and go about recycling in the correct manner;

The above costs build up to a significant threat to the bottom line of a company, however, the opportunity to improve overall cost efficiencies has pushed companies to begin looking at the flip side of logistics as the “new frontier” in the continuous improvement of supply chain performance.

What was once mainly an afterthought now has a name. And in a growing number of cases, there’s now a clear mission: How do we manage reverse logistics as an integral part of supply chain management to improve efficiency and reduce cost?

What are the benefits of an efficient reverse logistics network?

(1) Reduced costs – by planning ahead for returns and making the return order right, you can reduce related costs (administration, shipping, transportation, QA, etc.);

(2) Faster Service – this refers to the original shipping of products and the return/reimbursement of products. Quickly refunding or replacing goods can help restore a customer’s faith in a brand;

(3) Customer retention – as mentioned previously dealing with errors is just as important as making sales. If a customer had a bad experience with your product, you have to make it right. Fulfillment blunders can create educational opportunities. Learn how to keep your customers happy and engaged with your company – even after you’ve made a mistake.

(4) Reduced losses and unplanned profits – recover the loss of investment in your failed product by fixing and restocking the unit, scrapping it for parts, or repurposing it in a secondary market. With a good reverse logistics network in place, you don’t have to leave money on the table. Take a product that would otherwise just cost your company money and turn it into an unforeseen asset.

In summary 

An efficient reverse logistics network is vital in the new age of consumer-led retail. It will add costs to the business but at the same time companies should be planning ahead and embracing the benefits.

Consumer demands are changing and the expectation of being able to buy, fulfill and return anywhere means that you have to be creative and proactive with your warehouse strategies for both delivering the items and returning them. 

Every touchpoint between a customer and a brand is now an opportunity for the retailer to champion its brand, and product returns are no different. Offering a greater range of options in returns targeted at the individual customer can allow retailers to maximise the opportunities of returns and apply this success to new international markets. If retailers embrace this opportunity they can ensure it is the customer that returns, time and time again.

Robin Kiziak

#FinanceFundamentals

#RobinKiziak is an experienced finance manager with over 10 years experience in the distribution/logistics and retail industries