The $100 Billion Returns Question

Billion Dollar Return QuestionBy Karin Bursa, Executive Vice President, Logility

Now that the holiday season is behind us, retailers can sleep easy, right? Well, no. Seasons are now both shorter and more frequent which means you quickly move on to the next one. However, a large and rapidly growing issue has emerged: the cost of returns. Unwanted gifts, incorrect sizes, styles and fits that didn’t match expectations, the reasons are countless. To attract and retain customers, many retailers strive to make the return process as frictionless as possible. But at what cost? The ease of returning an online purchase has turned the bedroom into the retail fitting room. Consumers now purchase multiple variations of the same product to “try on” at home and then return the rest.

Following the 2017 holiday season, several industry pundits proclaimed retailers would lose about $90 billion (yes… billion!) in returned merchandise that could not be resold (Good news for FedEx and UPS: People just opened $90 billion in unwanted gifts). Recently, another report published claiming this number reached $107 billion for 2017 ($107 Billion Lost In Returns). Regardless of the final number, we are talking about a lot of money that simply should not be “thrown away to erode margins.”

Returns can be forecasted and much of that inventory can be placed back onto store shelves or made available through ecommerce, discount locations, etc. So, if retailers know the returns are going to happen, why are the losses so high? I sat down with retail industry veteran Jim Brown to learn more.

 

Karin: Are you surprised at the high cost of returns?

Jim: Not at all. When I was in the shoe industry, we experienced a higher-than-average rate of returns that could not be sold. Today, the consumer’s mindset has evolved and applied the same logic we saw in the shoe industry, try on a wide variety before you find the right one, to the rest of their purchasing habits. Consumers today are more comfortable ordering more and returning most of that order. It is too easy to add items to an online shopping basket knowing you have the option to return the merchandise with free shipping. And, since you used a credit card, you’ll never have to pay out-of-pocket.

 

Karin: Based on your experience, what happens to this merchandise?

Jim: Basic items typically do not make up the bulk of the returned merchandise. So, if the items are re-saleable, a lot of them will move into a markdown status by the time they make their way back to the store, or into the available warehouse inventory due to selling seasons. Unfortunately, it’s not as simple as taking it from the initial customer and placing it back on the shelf. Often, there are many hands that will interact with the merchandise—tags may have been removed, packaging may be defective, etc. All of this takes time, resources and investment to re-create and ready the merchandise for resale. Time is money and each ‘touch’ depletes your margin.

 

Karin: Why are retailers not able to place the merchandise back in circulation?

Jim: Most retailers will try, or have a process that should accommodate getting the product back into the inventory. The reality is most retail supply chains are optimized to bulk move allocated or replenished goods to the stores/locations. Handling one item at a time is a very labour-intensive activity. Determining if the item is damaged, repairable, tagged, packaged appropriately, etc. all adds to this cost. If you consider the margin on a single item, the least costly option may be to not handle it all. Of course, this is dependent upon the cost and margin of the item, so you need policies in place that accommodate all types of merchandise sold. This is the same reason why reducing store-to-store transfers is so important for retailers.

 

Karin: Are certain industries more prone to this issue?

Jim: Definitely. Health and beauty is a good example because this industry is heavily regulated. Once a safety seal is broken, that item is off the market for resale. Ready-to-wear is another good example due to its specific sizing which is also prone to returns. Technology becomes obsolete quickly, and the packaging is almost impossible to return to its’ ‘factory fresh’ condition. This forces the majority of these returns to be sold at a markdown, contribute to that staggering number you mentioned earlier and result in ‘open box’ promotions and discounts.

 

Karin: What are some of the ways retailers mitigate this issue?

Jim: This has become increasingly more difficult. In the past, retailers could require return authorizations or a short return window. However, in today’s competitive environment where shoppers have more options, retailers are hesitant to put up any customer service barriers. The prevalence of social media means one bad experience can be amplified across a broad audience and impact future sales. If I know the return process will be a hassle, chances are I will shop elsewhere. The best way to mitigate returns is to get the transaction right with the customer at the point of purchase. By providing as much information about the item to them as possible, easy access to customer reviews, etc. will lessen the chance that an item will come back up front. Some retailers are experimenting with virtual dressing rooms and other innovative technology to help minimize the volume of returns.

 

The cost of returns is truly an astonishing figure; however, as Jim outlines retailers are just not set up to handle the one-off item returns in a cost-effective manner. There are ways to minimize the burden including getting the sale right from the start. Additionally, retailers need to forecast the returns as a part of their planning process and develop more cost-effective measures for handling the merchandise as it comes back. If you are able to better predict the amount of returned merchandise you are likely better equipped to collaborate with your suppliers and partners to mitigate the cost to you while still delighting your customers.

 

About the Author

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Karin Bursa, Executive Vice President, Logility

With more than 25 years of experience in the development, support and marketing of enterprise software solutions, Karin is able to provide The Voyager Blog several provoking perspectives including market-shaping events, end-user perspectives and technical reviews. She is a widely quoted source on the evolution of the supply chain, frequent author to many leading publications, and can be found speaking at many of the industry’s leading conferences.

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Is Your Supply Chain Planning System in the Cloud?

Supply Chain in the Cloud - 310 x 175My job requires a fair bit of air travel so I literally spend a good deal of my time with my head in the clouds. At 6’5” most airline seats are less than comfortable and provide very little leg, arm and shoulder room, so I often find the most practical activity during a flight is critical thinking. Yes, I might look like I am taking a nap but really I am deeply contemplating things like the current state of deploying Supply Chain Planning Technology in the cloud.

With the explosive growth in supply chain complexity and data volumes, a growing number of manufacturers, retailers and distributors of all sizes are all looking for more agile, easily implemented paths to better supply chain performance. Some have found it possible to enact powerful supply chain optimisations almost immediately, while saving substantial amounts of working capital and ensuring timely support for growth and collaboration over the long term.

They have chosen to deploy supply chain planning solutions in the Cloud.

Cloud computing is a model for enabling convenient, on-demand network access to a shared pool of configurable computing resources that can be rapidly provisioned and released with minimal management effort.

Today, the range of implementation options for supply chain planning solutions stretches far beyond traditional on-premises hardware and software. Some competitive-minded organizations question the advisability of lengthy and complex infrastructure projects. These supply chain teams harness the full potential of the internet by taking advantage of deployment models with names like Software as a Service (SaaS), Platform as a Service (PaaS), Infrastructure as a Service (IaaS), and managed services.

Cloud-based deployment alternatives remove IT obstacles and accelerate the launching of supply chain initiatives. However, are the advantages of cloud deployments for supply chain solutions real and worthwhile? I think so, and I have provided a few of the biggest benefit areas for having your supply chain planning software in the cloud.

Benefit #1: Affordability and Savings

  • Lower upfront costs – Initial capital equipment expenses are reduced and total cost of ownership shifts to a highly predictable annual expense line item.
  • Optimal licensing, hosting and services options – The wide variety of options provide a solution delivery profile that fits just about any organisation’s software procurement model and budget process.
  • Ability to reallocate valuable IT resources – Cloud-based deployments free up enterprise IT resources to focus on strategic initiatives and meet mission-critical demands rather than installing software updates and performing system administration.
  • Scalability to handle supply chain growth – It’s a significant competitive advantage to be able to activate capabilities as requirements grow and flex over time.

Benefit #2: Tangible Business Benefits

  • Accelerated ROI – Cloud deployments often deliver better cash flow and create a positive bottom-line impact much quicker than traditional models.
  • Greater agility to react to change – Because “the infrastructure is on the internet,” there is no hardware to implement and no software to install. Users can access the system from any location through web-connected laptops, tablets and smart phones.

Benefit #3: Reliability and Security

  • Less risk of unscheduled downtime – Resiliency and high availability are characteristics of a well-designed cloud-based deployment.
  • Robust security – The fear that storing business data on a cloud server could make it vulnerable to unauthorised access has been assuaged by the great security track record of hosting providers in securing and ensuring data privacy.
  • Expert administrative services – No one knows the ins and outs of system administration better than the solution provider organisation itself. The provider’s technical personnel are an essential resource for installing software updates, hot fixes, service packs and version updates in an optimum computer environment.

According to Gartner, cloud computing has reached a sufficient level of maturity to be in its “productive phase.” In fact, cloud-based solutions have proven enormously successful in a broad range of commercial applications, revolutionising the affordability and “adoptability” of solutions for a much wider range of companies. It is time for Supply Chain Planning solutions to join in this success?

As you consider the benefits of a cloud-based supply chain planning solution, conduct a self-evaluation by asking these questions:

  1. Does your current supply chain planning technology infrastructure fall short of the task of providing the supply chain planning capabilities you need?
  2. Is it difficult in your organisation to drive new capital investments for updated equipment and systems?
  3. Is your IT staff overwhelmed with user support issues and other system administration tasks?

If the answer to any of these questions is “yes,” then it’s time to find out how a cloud-based solution can accelerate one of the most rewarding business improvement initiatives your organisation can undertake: Optimising your Supply Chain.

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About the author

Hank Canitz PictureHenry Canitz is The Product Marketing & Business Development Director at Logility. To read more of Henry’s insights visit www.logility.com/blog.