Returns to Sender

Jun 01, 2008 9:30 PM  By

Many merchants these days are working with such limited resources that they’re often stretched just to get product out the door to customers. What happens on the back end — say, when customers return goods to the distribution center — is often an afterthought.

But multichannel marketers need to pay just as much attention to reverse logistics, or the process of taking goods back into “forward-available” inventory.

Why? Because returns are a fact of life: Return rates commonly range from 5% for hard goods and gifts to more than 25% for shoes and apparel. So merchants of all sizes must become adept at reverse logistics to:

  • 1. Get and keep more customers
  • 2. Maximize and extend the value of goods sold
  • 3. Minimize the impact of returns on profits

Rather than view returns as a necessary evil, look at it as an opportunity to turn operational challenges into competitive advantages and increased sales.

After all, the relationship between returns policies and consumer purchasing is well documented through surveys and research. Consider the following numbers:

  • 95% of customers say they are likely to shop with an online or catalog merchant if the returns process is convenient, and 85% say they will stop buying from a retailer if the returns process is a hassle (Harris Interactive)
  • 75% of consumers surveyed say a simple returns policy is a deciding factor in their shopping behavior (KPMG)
  • 89% of online buyers say returns policies influence their decision to shop (BizRate.com), and 40% of shoppers don’t buy online due to returns difficulty (Jupiter Research)
  • Customers who have their complaints resolved quickly have a repurchase intention rate of 82% (McKinsey)
  • Customers will spend 5 to 20 times the initial sales price on subsequent services and consumables (AMR Research)

While an easy returns policy may be key for consumers, returns management is extremely complex and costly for shippers. The goal for many companies is fewer returns whenever possible.

The paradox, of course, is that the easier it is to return an item, the more returns you’ll have. Online shoes merchant Zappos.com, for example, offers one of the most generous returns policies in the apparel industry: Returns are free, with no questions asked. The result? A 35% return rate.

But just as staggering are Zappos’ consistently high consumer ratings — not to mention its double- to triple-digit annual growth. Zappos is able to charge full retail prices for its products, since the company’s returns policy and commitment to customer service are competitive differentiators.

Reverse logistics overview

The Reverse Logistics Association, a Fremont, CA-based trade group, defines reverse logistics as “all activity associated with a product/service after the point of sale, the ultimate goal to optimize or make more efficient aftermarket activity, thus saving money and environmental resources.”

Another organization, the Reverse Logistics Executive Council, estimates that reverse logistics costs account for nearly 1% of the total U.S. GDP. The impact of reverse logistics is most critical in industries with high return rates, warranty operations and short lifecycle products.

These include software, retail, computers, appliances, cell phones, publishing and others. Consider the fact that 300 million cell phones and PDAs go obsolete each year.

While “forward logistics” includes product development, materials management, manufacturing and distribution, reverse logistics refers to aftermarket call center support, asset recovery (returns, recalls, seasonal inventory, salvage, restock, obsolescence, etc.), service logistics (repair, refurbishment, warranty management, etc.), recycling and environmental management, and end-of-life manufacturing.

Few would argue that reverse logistics poses greater challenges than traditional forward logistics. The RLEC summarizes many of the important differences between forward and reverse logistics below.

To further demonstrate the greater challenges of reverse vs. forward, consider product returns, the most common aspect of reverse logistics.

Product returns start with the end user making an assessment about a product that can range from assumptions about proper functioning (“It doesn’t work”) to a change of heart (“I just don’t want it anymore”). The table below summarizes primary reasons for returns given by consumers.

Because the enduser initiates the shipment process, there’s little control over carrier or shipping service, paperwork and/or explanation for the return.

And returns management is labor intensive. Receiving crews must conduct research and make a series of decisions. What goods have been received? Complete or partial order received? In what condition? Restock, repackage, return to supplier or scrap? Does the item returned match the original order? Can we authorize a credit and/or exchange?

Finally, the returned item must be documented, barcoded and warehoused.

As a result of these challenges and costs, many companies are forced to offer a variety of returns policies depending on the product. Amazon.com developed a list of 28 different returns policies by product and value (books, electronics, beauty products, etc.)

Factors to consider in returns management

When developing your returns policies, your corporate reverse logistics team should balance customer satisfaction as well as corporate profitability.

You have to consider several other factors. A big one: Why is the product being returned? For example, you may offer free returns for products returned because the wrong product was shipped, but charge a fee for products returned due to a change of heart.

Take into account the time elapsed between purchase and return, the dollar value (“is it worth returning?”), and the characteristics of the product itself (“what’s the cost to return the item?”). Consider the added shipping costs of bulky or heavy items, and for returns from international customers.

The customer lifecycle is also important. What’s the likelihood the customer will order from you in the future? What’s the financial impact of a happy customer over the years?

Best practices in returns management include the following steps:

  • 1. Develop returns instructions that are clear and easy to follow.

  • 2. Include a returns form that instructs customers to provide a reason for the return, and if they want an exchange or credit. The reason for the return can help the returns team determine how to handle the item (restock, repackage, repair, etc.). The returns form should capture the original purchase information (barcode, purchase order or other identifier) to validate the return and authorize credit.

  • 3. Develop a return label with prepaid postage/shipping, and a method to deduct the freight charge from the customer (if appropriate).

Parcel carriers DHL, FedEx, UPS, and the U.S. Postal Service offer a variety of services, costs and labeling options for handling returns. There are several third-party logistics providers (3PLs) and parcel aggregators that specialize in handling returns. See resources below.

Finally, monitor returns closely. Understand which products are returned the most and for what reasons. Track the percentage of returns by SKU sales. Once you’ve identified the products with the highest return rates — and the reasons for the returns — try different approaches to reduce or eliminate those rates (modify or close-out the product, change order instructions or packaging techniques, etc.).

It’s true that returns can be an operational challenge and a work in process, particularly for smaller and growing direct marketers. But remember that mastering reverse logistics can help you change operational challenges into competitive advantages. Just ask Zappos.com.


Rob Martinez is a partner at Navigo Consulting Group (www.navigoinc.com), which provides distribution analysis and carrier negotiations.

FORWARD LOGISTICS REVERSE LOGISTICS
Forecasting relatively straightforward Forecasting more difficult
Distribution is one to many Distribution is many to one
Product quality uniform Product quality not uniform
Destination routing clear Destination routing not clear
Pricing relatively uniform Pricing dependent on many factors
Disposition options clear Disposition options not clear
Importance of speed recognized Speed often not a priority
Forward distribution costs visible Reverse costs less visible
Inventory management consistent Inventory management not consistent
Product lifecycle manageable Product lifecycle issues more complex
Straightforward negotiation between parties Negotiations complicated by several factors
Marketing methods well known Marketing complicated by several factors
Visibility of process more transparent Visibility of process less transparent
REASON %
Product was not what I expected 40%
Product was damaged 31%
Quality not as expected 31%
Right product, wrong characteristics (color, size, etc.) 27%
Wrong product 26%
Decided I didn’t want it 19%
Product delivery was too late 17%
Partial order received only 7%
(Source: PricewaterhouseCoopers LLP)

Reverse logistics resources

FedEx (www.fedex.com)

Newgistics (www.newgistics.com)

Reverse Logistics Association (www.reverselogisticstrends.com)

Reverse Logistics Executive Council (www.rlec.org)

Reverse Logistics Professional Report (www.ReverseLogisticsProfessional.com)

United Parcel Service (www.ups.com)

U.S. Postal Service (www.usps.com)