Four Key Logistics Goals

Figure 1 shows the breakdown of backorder costs for a small direct business. If this business had 200,000 orders with 400,000 units, and backorders were calculated at 20%, then 40,000 united would be backordered. At $7.37 per unit, backorders would cost this direct marketer $294,800. More important, the numbers don’t include hidden costs: the buyers’ time to accelerate backorders, air freight to bring stock in faster, the loss of customer goodwill. Permanently losing a customer because of poor service has the highest cost.

The third type of cost element is the erosion of gross demand by customer returns and customer and company cancellations. Figure 2 shows typical return rates by category. The higher the fashion nature of the product, the higher the return rate tends to be. Sized or tailored fashion products have higher returns.

Returns also cost far more than orders to process, and in many businesses, only one-third of the returns are exchanges. The cost of processing a return includes

• the original cost of order processing ($3-$6 in most direct business), including indirect and direct labor, credit-card processing fees, occupancy costs, and phone lines
• customer acquisition costs
• the cost to process returns and refurbishing items, including indirect and direct labor and occupancy costs
• loss of shipping and handling revenue if refunded from outbound or inbound transaction
• loss of gross margin
• potential loss of customer if shopping or return processing experience is unsatisfactory.

For high-return categories and businesses, reverse logistics services typically allow customers to send returns into the pipeline closest to their location, either at home or via a retail outlet. The reverse logistics provider should offer systems that provide visibility into goods being returned in advance of receipt in the retailer’s distribution center. This will not only allow the merchant to schedule resources accordingly, but it will also give the merchant an estimate of return goods that will be available to fill new customer orders. Additionally, some merchants start the refund or credit process when customer returns have been received.

Another aspect of costs is cancellations. Industry standard for excellent customer service puts cancellations as a percent of demand at 2% or less. For apparel direct marketers, however, it is not unusual for cancellations to be 4%-8%.

There are no historical selling data for apparel, because of the high percentage of new product. New products can run 50%-75%, four seasons a year — that’s simply the nature of the apparel industry. Catalogs with fewer new products or with categories that have a higher ability to be reordered,have lower cancellation rates. Business-to-business cancellation rates may be less than 1% to several percent; home decor rates may be from 1% to 3%.

Obviously the speed of getting resalable returns back into inventory availability and the reduction of costs of returns can greatly affect profitability. Leading merchants acknowledge returns as part of the cost of doing business and include a convenient return process as part of the customer experience.