In the early days of e-commerce, returns flew under operation’s and finance’s radar, and perhaps rightly so. The volume of e-commerce purchases was low, and returns were minimal and simple. During these early days, returns meant including a preprinted returns shipping label in the original package, which put the onus of the return squarely in the consumer’s court. Quantifying the cost of returns was basically relegated to parcel transportation costs and determining the returner’s share of that cost.
Amazon’s returns model and the pandemic changed the rules – and the tools – of engagement. E-commerce sales grew by 32% from the previous year, while returns grew nearly five times that amount. Consequently, returns management became a top priority for many forward-thinking trading partners. Margin erosion from excessive returns began eating up bottom-line dollars, but to what extent remained a mystery.
While margins and return costs vary greatly by industry, company, and category, trading partners are being forced to measure and address their returns practices to avoid further diluting their hard-earned profits. Therefore, product returns have secured a spot on the executive’s “short list.” Typically, companies fall into one of three classifications for returns management and processing.
The early adopters, seeing the writing on the wall, understand returns-related costs and are actively engaged in implementing solutions that provide intelligence and visibility into the post-purchase activities and behaviors of their consumers. They have embraced score-carding consumers and are actively adjusting return policies accordingly. Early adopters are also incorporating rules-based engines, machine learning, or AI to identify optimal disposition methods to maximize value recovery and minimize environmental impacts.
Taking Care of Business (TCB)
Companies in the TCB category have mature returns models and processes in place. However, they are not proactively mining their data; therefore, insights are limited – which is a key barrier to improving the returns process. As the saying goes, “You cannot improve what you cannot measure.” Companies in this classification will soon step up their returns effort as they learn business-as-usual is not a sustainable approach.
The final classification is the Laggards. These companies view returns as a necessary evil – one that cannot be stopped without risking the loss of a shopper. To combat the escalating cost of returns, these companies often focus on top-line growth. This, of course, can exacerbate the issue until they clearly understand the hard- and soft-costs of returns. Once this is determined, they can begin improving returns processes and policies by comparing these costs to the lifetime value of a customer.
All companies, regardless of classification, must embrace returns as a non-linear process and suppress the urge to reallocate resources from forward-logistics to reverse logistics.
Self-Evaluating Your Returns Management Methodologies
The path to “returns enlightenment” begins by understanding where you are in your current approach and then comparing your position to where you want to be. This is not as simple as it may sound given the complexities involved, such as disparate data and metrics, change management, shortage of labor, and organizational disruption – just to name a few. A good starting point is to honestly agree or disagree with the statements below. Keep in mind, there are no “right” or “wrong” answers since these statements are merely to help you understand your current position.
1.We have staff dedicated to returns management or outsource this function.
2.We know our true return cost components (soft and hard): Items like labor, customer service, space, transportation, cost of money, inspection handling, restocking, customer friction (loss of future orders), etc.
3.We monitor the return’s cost impact by time periods, customers, trends, etc.
4.We have analyzed our reverse logistics network model in the last 12 months to optimize the facilities network and zones/distances where returns are sent.
5.We can determine optimal disposition methods while adhering to our clients/brands returns mandates.
6.Our company focuses and monitors the cycle time of a return just like we do on the speed of fulfilling an order.
7.Our 3PL (if utilized) knows how to do returns and we understand how they bill us for these returns.
8.We communicate with shoppers across the entire path-to-purchase and path-to-return.
9.We are reviewing or revising our returns policies every six months.
10.Our sustainability efforts are integrated with our returns management.
Keeping Returns Costs in Check
There are traditional ways to lower the return costs, such as negotiating parcel rates and altering your return policies. Other, non-traditional cost containment measures include shortening return zone exposure, refining inspection processes, improving returns technology, or outsourcing the entire returns management process. Additionally, decision support systems can increase the quality and speed of decision-making. These intelligent systems balance costs with benefits, which is critical as parcel, warehouse space, and labor costs escalate at unprecedented rates.
Michael Foy is Director of Business Development for Inmar Intelligence. He can be reached email@example.com.
This article originally appeared in the September/October, 2021 issue of PARCEL.