Dirty Little Secrets of Holiday Returns 1: E-Commerce & CX

It’s not just brick and mortar retails that suffer the influx of holiday gift returns.    From eligible items to those ignored by holiday shoppers until the final day allowed by the return policy, holiday returns cost both retailers and consumers real money and result in real world inventory management challenges.  With the continual increase of e-commerce sales comes another increase, that of holiday returns.

Whether the unwanted gifts came from holiday shopping done in person at major retailers or online to take advantage of free shipping costs, merchandise returns snowball during the extended holiday returns period, causing distress all around.  The cost of processing returned goods continues to soar, causing retailers, e-tailers and shipping carriers to look for new ways to reduce the cost of reverse logistics.

This is a complicated problem to solve.  E-commerce sites must balance the cost of reducing reverse logistics expenses with their ability to meet consumer expectations. 

Customer Experience (CX) is top of mind for retailers and e-tailers.  Consumers have come to expect (and demand) an easy, stress free shopping experience with an abundance of options, control and convenience in making returns and purchases and have not been tolerant of restocking fees or complicated methods to return or exchange unwanted gifts.

According to the 2017 UPS Pulse of the Online Shopper Study, although consumers express a preference to return items purchased to brick and mortar retail stores, three in four consumers reported returning goods by shipping the items back to the retailer.  Although surprising, it seems likely that consumers choose to ship returns as compared to physically returning them to the store due to offers of free returns shipping.  In this study, 79% of online shoppers considered free returns shipping as an important factor when deciding to purchase from an online retailer.  An industry study reported that 81% of survey respondents indicated that that they were less likely to make additional purchases on websites that charge to process returns.

Consumers expect to have returns processing made easier, not more complicated and do not want to have to be challenged by unclear returns policies. Most consumers are completely unaware of the challenges and complexity that retailers and e-tailers face in dealing with returns and do not realize the tremendous cost and burden that this places on the supply chain network.  Many consumers who shop online make purchases with the express intention of returning at least some of these goods.  Most goods that are returned to retailers are not sold again at full rates. Returned merchandise that is sold at discounted rates or outright disposed of cost retailers 4.4% of total revenue annually if the retailer’s operation is not optimized to process the reverse flow of inventory.

Returns Management and Reverse Logistics Across the Supply Chain

The simple fact is that historically, supply chain networks were not designed to handle the reverse flow of goods.  Originally supply chain networks were designed to handle the flow of goods from the point of production to the final point of sale. What is reverse logistics?  According to the Council of Supply Chain Management Professionals (CSCMP), reverse logistics can be defined as “the movement and management of products and resources after sale and delivery to the customer, including product returns for repair and/or credit”.    Reverse logistics typically refers to more than the processing of returned goods and includes the value added processes involved in handling, servicing and returning to the customer, putting goods back into inventory or refurbishing goods for resale.

With the cost of returns growing every year along with online sales, new solutions need to be found in order to keep the cost of goods down to meet consumer expectations.  One solution involves improving and expanding supply chain networks.  This involves adding more warehouses and distribution centers in order to support the reverse flow of inventory.  Retail and e-commerce companies that choose to process returns goods in-house, will, in all likelihood need to expand their logistics footprint either through acquisition of new facilities or space or through expansion or build out to accommodate a parallel reverse supply chain network.

Another solution for retailers and ecommerce stores involves outsourcing returns processing and reverse logistics to third party logistics providers (3PLs).  This would enable the retailer or e-commerce company to make inventory management decisions and rely on the power of the 3PL to handle, process and distribute the returned goods.  Outsourcing enables retail companies to take advantage of the locations and best-in-class logistics systems utilized by most 3PLs.  Outsourcing to 3PLs provides efficiencies that result in reduced costs and greater excess inventory value.

A Gartner study entitled “Returns-the New Battleground for Retail” calls this problem “the ticking time bomb of multichannel retailing”.  The continued growth of sales through the e-commerce channel only increases the volume of returned goods.  Because consumers cannot physically interact with goods for which they are shopping, they tend to use the e-tail experience as a “virtual changing room”, buying more goods than they actually intend to keep.  The Gartner study researched the multichannel fulfillment and returns practices across an array of retail sectors.  According to the Gartner study, the companies studied only resold 48% of the goods returned by consumers at full price.  70% of respondents indicated their belief that their returns volumes would increase as sales continue to advance.

This presents a “double edged sword” type of challenge.  In order to remain competitive in a crowded omnichannel world, e-commerce vendors need to continue to provide an attractive Customer Experience and reduce the amount of online purchasing transactions that are abandoned before completion.  Studies by the Baymard Institute reveal that nearly 69% of online shopping carts are abandoned before transactions are processed successfully.   Of this, 61% reported abandoning their shopping cart due to the extra cost of shipping and other fees as well as unsatisfactory returns policies and other factors.

Simplifying returns for consumers can help to convert more customers, however, doing so potentially reduces profits.  This is because of costly returns processing and the typical inability to resell enough of the returned goods at full price.  By making returns easier, the volume of returned goods is certainly likely to increase, however it is also very likely to increase sales volume.

The answer may lie in achieving the proper balance.  Improving reverse logistics processes can create efficiencies that reduce the costs associated with processing returned goods but it will require investment.

Today, most retailers are still taking the opposite approach.  They are making returns more difficult for consumers and underinvesting in resources, capabilities and facilities that can make reverse logistics less costly.  This is not having the desired effect.

Today’s consumer is more demanding and has the power to buy goods from across the globe.  This increased amount of competition for the consumer dollars empowers consumers to be more selective, simply because they have more options and the money to satisfy their desires.  In order to compete more successfully and increase online sales, retailers and etailers need to focus on converting more online shoppers.  According to industry studies, this likely hinges at least partially on providing attractive returns policies and processes.  This problem is only advancing in terms of complexity at this point.

The increase in the success of multichannel retail has made “buy anywhere, return anywhere” a popular theme in today’s culture.  Even Amazon has harnessed the power of in person returns as an option to retain their market position as a top Customer Experience vendor.

How to Improve Multichannel Retail & E-commerce Returns Management

Re-envision then re-engineer your retail supply chain to accommodate returns processing of goods the most efficiently and cost-effective way possible. Think about your supply chain differently.  Today, the retail supply chain is circular, not linear.  This requires more balance between outbound and inbound flow.  Consider the sheer volume of goods being returned and plan accordingly to prevent blockages, leaks and delays.  This does not mean that when reimagining your supply chain for reverse logistics, the forward supply chain can simply be reversed.  Managing reverse logistics necessitates different processes, technological resources, expertise and capabilities.

One of the first steps in reimagining a reverse supply chain is to map out the process.  Each step in the processing of returned goods must be defined along with the process owner.  Once this has been done, you can explore ways that technology and systems can be employed to track and value the flow of returned goods.  This is especially critical where integrations with a third party provider will be required.  In order to measure the success of the process, it is necessary to use KPIs.  Setting up a process driven system using key performance indicators will enable key stakeholders in the process to be made aware of issues such as remaining shelf life, especially as this relates to the lead time in products being available for resale.

It may prove advisable to consolidate outbound and inbound distribution activities to specific geographic locations or areas.  This can then be broken down to focus operations on either route-to-market or reverse logistics operations in order to associate activities more seamlessly.  This can potentially increase the speed of returned products for resale.  If third party logistics providers are utilized for returns processing, it is critical that relevant IT technology systems are integrated.  Having real time access to information on product inventory including KPI management, inventory visibility, reports and notifications can prove essential in cutting down wasted time in processing and decision making.

Plans need to be developed to manage returned merchandise across the supply chain and logistics network independently of the route-to market supply chain.  It will be necessary to develop a process to ensure that returned goods are systematically added to the store inventory file upon receipt.  It is essential that these goods are visible on all WMS and other technology systems.

Ensure that your business can label, scan, track and process returned goods efficiently.  It is critical that a firm process be put in place with adequate oversight and measurement of key performance indicators (KPIs).  This will help to prevent returned goods from being considered out of commission and unavailable for immediate resale opportunities.

It is also especially important in reverse logistics to have the capability to collect and analyze data in order to forecast the timing, methods and occurrence of returns processing.  Being able to distribute returned goods requires data involving supply and demand.  This is where real time data and supply chain software become key to ensuring that information flows in a timely, accurate manner.  Incorporating demand forecasting into supply chain operations, especially at an item/channel/location/week level can help minimize loss and waste attributed to returns processing.  Most retailers do not apply the demand forecasting approach to returns processing and reverse logistics.  Because of this, retailers tend to operate reactively, rather than pro-actively.  As product returns continue to increase in volume, this presents a broadening dilemma.

Ideally, retailers would likely fare better if they collected and analyzed data on the product returns patterns across various channels.  The data could be extended to predict patterns in returns as well as to develop a greater understanding of the causes of returned goods so that better business processes could be developed and adopted. Proper analysis of this data could be used to ensure that their operations possessed the necessary capabilities and methods to handle the projected pattern of returned goods.  Having this data in advance enables better supply chain planning.  By being able to anticipate returns volume, retailers would be better positioned to align the processes and people to manage the returned goods.  This would also enable future development of more effective strategies based on improved understanding of the root causes, effect of returns policies and other factors that influence consumer decisions to return goods.

Summary

Fa-la-la-la-la-la-la-la-la!  Bah humbug!  With the rate of holiday returns exceeding 8% for brick and mortar retailers and 15-30% of total sales for online retailers, the supply chain network is often stressed to capacity in dealing with the huge influx of goods into a system that was not designed to handle reverse logistics.  In 2016 alone, the holiday returns for November and December reached approximately $70 billion dollars, without e-commerce.

Retailers need a solid, effective supply chain strategy for returned merchandise.  Although many retailers attempt the supply chain management process of returned goods on their own, there is a tremendous volume of waste in terms of time, money and goods.  This cost then is passed along to the consumer. 

Consumers who purchase online often base buying decisions on return policies and fees as well as on the anticipated ease with which merchandise can be returned.  This means that changing return policies or adding restocking fees could drive consumers to competitors, reducing sales.

What should retailers do?  Online retailers have particularly difficult challenges.  This is largely due to the fact that consumers are unable to physically interact with merchandise to judge color, size, fit, quality and other factors.  Because of this, industry studies indicate that consumers tend to “overbuy”, purchasing more merchandise than they actually intend to keep.  This higher incidence of returns needs to be taken into account when developing supply chain management and sales strategies for online retailers.

Online retailers must constantly work to improve the rates of shopping cart abandonment in order to keep sales high.  Studies involving online shopping carts reveal that two of the most important factors in abandonment involve consumer views regarding shipping and returns.  Keeping a balance between ease, cost and timeliness of these factors is tricky but necessary in order to generate sales.

So herein lies the challenge.  To keep consumers happy, online retailers are forced to retain return policies that encourage merchandise returns, all the while knowing that this practice eats into profitability.  To combat this, retailers often outsource returns processing to third party logistics providers who utilize top notch technology and sophisticated logistics capabilities to save time and money.  3PLs rely on skilled, experienced warehouse workers to inspect and process returned goods and perform an array of value added services for retail clients.  These value added services help to get merchandise back to an appropriate condition for re-sale so that the retailer can recoup lost money due to the return by holiday shoppers.

Another way of meeting these challenges head on is to have retailers re-imagine and re-engineer the returns process.  While this is plausible, it often requires significant investment by the retailer for facilities improvement, expansion or purchase and often, for new and improved technology.

As the rate of holiday returns continues to rise for both brick and mortar and online retailers, it seems as if a supply chain logistics apocalypse is approaching.  Stay tuned…..