With the rapid growth of e-commerce, companies of all sizes are striving to maintain competitiveness by investing in the fulfillment side of their supply chain. While the focus on fulfillment can make business sense due to the sheer volume of operations and increasingly demanding customer expectations, reverse logistics should not be overlooked. Returns are an increasingly critical and integral part of creating a great customer experience. However, the costs to manage them are becoming more significant as well.
From my perspective, the per-unit costs of returns — accumulated from customer interaction through final disposition — are much higher than products moving through the fulfillment side of the supply chain. These costs, in conjunction with the increasing complexity of managing returns, require the same amount of optimization as the forward supply chain to design a customer-centric and cost-effective operation.
Reverse logistics can become an opportunity to foster customer loyalty and drive profitability when done well. This article reviews the central role of returns in the current state of retail and highlights different approaches and concepts that can help manage the increasingly complex returns environment to reduce waste, prevent the amount of returned product and optimize processes.
Managing the growing returns challenge: a threat or an opportunity?
Consumers return more than $640 billion of products annually, and the average return rate for e-commerce orders is 30 percent compared to 9 percent from purchases made at brick and mortar locations1. With the continued growth of online sales, the cost of product returns will continue to increase for brands. I believe that an increase in returns presents an opportunity for companies and 3PLs to drive a competitive advantage through a strategic program that involves the brand experience, physical storefronts and purposeful disposition methods.
Forward supply chain optimization: a model for better returns management
For decades, manufacturers, retailers and their logistics partners have been applying significant resources and expertise on optimizing the forward supply chain. Whether an entrepreneur is starting a new business or an established brand is launching a new product, the team must first evaluate the market and price the product to cover costs and generate a profit. If the market won’t support a price at which the business can manufacture and deliver the product profitably, the company must either modify the product or stop production.
All companies must consider their sales channels and customer expectations for product delivery when it comes to the supply chain. Historically, this implied selling through traditional brick-and-mortar retailers, but logistics networks have grown in complexity in a response to online spending.
Given these delivery requirements, teams must design and implement an optimized supply chain strategy, considering all of the steps from manufacturing to delivery. These steps include:
1. Deciding on the optimal location for manufacturing.
2. Utilizing a sophisticated network and powerful analysis tools to locate distribution centers.
3. Following sales and operations planning processes to support inventory plans.
4. Implementing warehouse automation and optimization technology and Transportation Management Systems to efficiently store, fulfill and transport products.
Opportunities for improvement in traditional returns management
Although companies carefully strategize on their forward fulfillment and distribution, it’s often a default to place returns in the back of the distribution center. This approach creates a separate but nearby returns center – rarely do brands analyze and optimize for location.
Companies often create a one-size-fits-all solution for returns which involves bringing all returns back to the centralized processing point, including product that’s processed and then discarded. I strongly believe that companies must apply the same profitability filters utilized on the forward supply chain for the reverse supply chain to identify opportunities to eliminate inefficiencies.
If brands extend the one-size-fits-all perspective for prioritizing and managing returns processing, their traditional returns model will process returns for very different products with the same priority. If they peel back this opportunity, they may realize that products can be at a point in their lifecycle where the value is rapidly decreasing or conversely, relatively stable. As a result, they can come to a conclusion that demand for different products is highly variable and failing to account for this variability leads them to a missed opportunity to optimize redeployment of the product.
In addition to improving the bottom line, returns offer a chance to improve the consumer brand experience. A well-designed reverse strategy has the ability to further simplify the process, speed up crediting time and improve overall returns avoidance for shoppers.
Creating a competitive advantage through returns management
Returns management is a strategic consideration which requires technology investment, operations planning and labor allocation. By meeting consumer expectations of “free shipping and returns,” businesses will notice that this model drives up costs of returns and triggers a more in-depth analysis of the policy itself. However, businesses are beginning to shift away from this approach as return rates associated with online spending continue to rise.
The answer to improving the customer experience isn’t just about making the return shipping free, however. One way that online retailers can improve their customers’ returns experience is to provide a brick-and-mortar returns option. Surveys show that 62 percent of shoppers are more likely to shop online if they can return an item in store2. Many e-commerce retailers also have storefronts and this allows them to easily offer this option. Today, more than half of return polices allow for customers to return online orders to a store for a refund or replacement which has emerged as a core consumer preference.
Today, customers frequently make buying decisions based on their level of confidence and comfort with how their returns will be handled. Nearly 70 percent of online shoppers check the returns policy before completing their purchase. Buy Online Return In Store (BORIS) is becoming a huge value proposition and also has the ability to generate additional spontaneous sales from customers. However, this assumes that there is a brick-and-mortar option available for the customer.
Taking returns closer to the customer creates a better customer experience, and enables a more optimized returns management process.
While companies wouldn’t continue producing a product that costs more to make and deliver than what it’s worth, companies often don’t apply the same logic to returned inventory. Instead, brands will routinely pay to ship product back to a returns center, receive and process the return only to later dispose of it because there is insufficient value. This traditional way of handling returns is beginning to significantly impact the bottom line as costs to manage returns currently offset 4.4 percent of retailers’ total revenue.3
One element of an optimized returns strategy is to take the returns closer to the customer, and optimize the management of the return from that point. Businesses should provide optimized return locations, selected by traffic volume, to improve the overall customer experience, reduce costs and improve profitability.
With an optimized returns strategy in place, retailers can improve the customer experience by:
1. Providing immediate credit
by having a customer return product to a person who can validate the type, quality and condition of the return, right on the spot.
2. Lessening customer frustration
with packaging their returns for shipment by providing a storefront for this process solves this problem. In turn, you’ll also decrease the number of damaged product and expensive shipping costs.
3. Strengthening the brand experience
for the shopper by having a person accept the return and hear the voice of the customer directly. It will also generate a better understanding of the actual cause of returns.
4. Giving consumer alternatives
to the return by either troubleshooting a product believed to be defective or providing a product exchange opportunity.
In addition to improving the customer experience, customers can better maximize cost-effectiveness in the following ways:
1. Minimize fraud:
Data shows that customers are less likely to fraudulently return product in-person compared to shipping to a returns center, improving a retailer’s overall revenue stream.
2. Improve returns avoidance:
A storefront return location also provides an opportunity for returns avoidance. For technology product returns this may incorporate instore diagnostics or even light repair – potentially eliminating the lost revenue and cost of further processing of that return.
3. Accelerate redeployment times:
Probably the greatest opportunity for cost reduction is in optimizing the disposition decision and the pace of returns handling. By utilizing centrally managed systems, we can leverage information regarding the recovery value for the product and the cost of processing, the current supply and demand for that product as well as the rate of value decline.
Much like optimizing forward supply chains provides an opportunity to achieve a competitive advantage, reverse supply chains represent an opportunity to significantly improve the customer experience and the associated total supply chain costs.
This strategy should focus on the “first mile” of the returns process, and should provide an opportunity for a brick-and-mortar returns location – a key element of a more customer-friendly returns program. Receiving the return closer to the customer also enables better business decisions to be made on how the return is handled before any unnecessary costs are incurred.
Customers can easily make more informed decisions about their strategy with real-time information about value and demand. These decisions will later lead to better direction to the collection points for optimized routing and processing.
By focusing on the first mile of the returns process and designing a more holistic product network, which includes reverse strategies, businesses can maximize profitability and improve the overall customer experience.
Go to supplychain.fedex.com to learn how FedEx Supply Chain can support your reverse logistics strategy.
1 CBRE Research, “Swimming upstream: navigating the world of reverse logistics,” February 2016
3 CBRE Research, “Swimming upstream: navigating the world of reverse logistics,” February 2016
Jeff Elliot, Managing Director, Technology Sales, FedEx Supply Chain. As Managing Director of Sales in Technology Solutions at FedEx Supply Chain, Jeff Elliott spearheads the company’s strategic approach to expanding the customer portfolio within the technology vertical, while fostering the existing customer base. In this position, Elliott serves a vital role in driving lead generation, prospect engagement and relationship management for the Technology Solutions business unit.
FedEx Supply Chain helps technology customers streamline operations, optimize their logistics networks and drive continuous improvement with its innovative, industry-leading solutions.
During his more than 30 years in the field of global sales, supply chain management and consumer electronics, Elliott has served in numerous positions of increasing responsibility. He has extensive experience in sales leadership, international expansion and commercial team development.
Elliott received his bachelor of science in chemical engineering from North Carolina State University.