The Logic Behind Return Logistics

Returned merchandise tends to be the pink elephant in the middle of the warehouse that everyone sees, but no one wants to admit is there. So many times it gets put aside for months, losing value and taking up space. Returns might be a necessary part of business, but they can be more profitable than one might think - from a variety of angles. The return process provides a chance for retailers to collect valuable data, interact with their customers on a personal level, and form an extended relationship with their suppliers.

The process of reverse logistics is the movement of returned retail merchandise throughout the reverse supply chain to its ultimate destination - its disposition. Returns can go back into store stock or to the vendor, be destroyed, or go into liquidation. There is more involved than simply managing the product information. Retailers need to establish a plan to dispose of the physical merchandise. Luckily for retailers, there are software and service providers that can take care of part or all of the disposition, saving time and resources.

Mark Hilinski, VP of marketing at The Return Exchange, and Darren Bien, analyst for commerce infrastucture at Jupiter Media Metrix, discuss the importance of a return logistics solution for retailers.

Why is returns management so often an afterthought in designing the supply chain?

Mark HilinskiMost retailers simply view returns as a percentage of their business, and most only calculate it to be about 5%. They don't think they should spend time worrying about such a small percentage. The problem is that they are almost always wrong about the cost of returns - it's really more than that. If retailers understood the true cost of processing returns, it wouldn't have such an insignificant position on their to-do lists. Retailers don't treat returns like it is a big problem in terms of budgets or employees because they don't consider the true costs involved with reverse logistics. Even the price of gas and the maintenance on a delivery truck should contribute to the cost of transporting a returned item from point A to point B.

Why is there a need for a reverse logistics solution from a retailer's perspective?

Darren BienOnline returns alone are expected to reach 90 million in 2005. This is $5.8 billion worth of goods that will be going back to e-tailers just in the United States. If we start to talk in those kinds of numbers and there is not a process for recouping a significant portion of that cost, returns will have a dramatic impact on retail profitability. Once merchandise is returned, retailers have already paid for it, and without proper processing it becomes dead stock. The faster a retailer can redistribute returns through a secondary channel or in their own stores, they can recoup more of the original cost.

How do returns affect the entire retail supply chain?

Mark HilinskiThe process of honoring and processing returns causes retailers to expend energy, resources, time, and money at many points in the supply chain process. One area it affects is a retailer's relationship with its suppliers. There could be a real problem if a retail buyer bought 200,000 sweaters from a supplier, and 25% of those sweaters were returned because they were ticketed as medium instead of small. If the buyer gathers information about the product's return trend before receiving the next allotment, they can contact the manufacturer and insist on a quality inspection. If returns aren't managed carefully, it can take up customer service time and space. Sometimes it ends up that mistakes made on the front end are made up for in the reverse process, but it doesn't have to be the case.

Darren Bien Some retailers wait until they run out of room in their warehouse before they call the liquidator. If part of the warehouse serves no other purpose other than storing returns, then when it is empty it is useless to the supply chain. If it gets full, then employees whose jobs are to work on the forward supply chain have to figure out how to empty it. This inevitably impacts the forward selling cycle.

Where can retailers see the most ROI (return on investment) from a reverse logistics solution?

Mark HilinskiIf retailers manage their returns well, they can actually lower return rates and realize a higher rate of recovery from the resale of merchandise that cannot be sent to a manufacturer or distributor, while still maintaining a high level of customer service. There are ways to use data captured at the point of return to direct merchandise to the most appropriate location - back to stock, supplier, or liquidation. This data can help retailers minimize touch points through the reverse logistics process resulting in substantial savings. For example, product destined for liquidation can be directed for resale preparation in another secondary market channel, such as online auctions.

Darren BienRetailers should capture data as to why the return is happening. Even if they have a no-questions-asked return policy, they can determine the reason for each return and use the information to identify trends. This can lead to adjustments to merchandising strategy, packaging, and product quality. However, to get good and actionable data, retailers have to be consistent with their policies. An e-tailer that changed its policy to say that it would only pay shipping for damaged goods, suddenly saw an increase in the number of returned damaged goods. Some of them looked like the customer had deliberately taken a hammer to the product. The retailer could have learned a great deal by accepting any return and simply asking for the legitimate reason.

What options do retailers have in terms of returns management?

Mark HilinskiThere is off-the-shelf software that can provide retailers better reporting and additional improvements in the returns management process. Honoring returns is necessary, but retailers don't dedicate the resources to processing returns and forcing them back through the reverse supply chain. It makes sense that they should focus mainly on the forward supply chain. An option is to outsource the whole process (the collection of the information, the physical handling of the product, and the resale of the product into the appropriate channel).

Darren BienThis is where the brick-and-mortar retailers that have moved online come in with an advantage. Many offer in-store returns, which allow the products to be immediately placed back on the shelves. There are also return service providers that have established points of presence via neighborhood mail centers. This enables retailers to take goods back to a Mail Boxes Etc., for example, where mail center employees act much like returns clerks at a store. They can even grant immediate credit for the return.

What are the benefits of outsourcing returns management?

Darren BienHandling returns is really a customer service process. However, no retailer wants reverse logistics as a core competency in their business. Retailers don't want to build a staff and a budget to operate reverse logistics, so there are companies that will manage part or all of the process. Outsourcing allows retailers to maintain customer contact without having to deal with the returns themselves. Retailers can even maintain consistent branding on every interaction with consumers through company return authorization slips.

How can a reverse logistics solution positively or negatively affect a retailer's relationship with its customers?

Darren BienManaging customer returns is important to future relationships because it builds loyalty. Studies prove that when customers are dealt with fairly and efficiently, they are more likely to shop with that company again, as opposed to those who never had to deal with the customer service desk. It stems from the idea of personalization. Also, collecting information on returns can lead to CRM (customer relationship management) and one-to-one marketing.

How can a reverse logistics solution positively or negatively affect a retailer's relationship with its suppliers?

Darren BienThe last thing suppliers want to see is products coming back on a truck that are six months old. They too are interested in maximizing the value of that return, whether it is through refurbishment, sale through a secondary channel, or destroying them. Manufacturers who are one step removed from the consumer are eager to get any information that they can in regards to improving the product or the selling process. Certainly they would appreciate the retailers that can give them that kind of visibility.