Two-day, two-hour and free shipping have all come to be expected when selecting a shipping option, but this assumed convenience for consumers comes at a cost for retailers and online merchants. Not only is there pressure to offer free shipping to stay relevant in a highly competitive e-commerce marketplace, but with the rise of e-commerce shipping comes the correlating rise in e-commerce returns. Whether the product is coming or going, consumers are gradually becoming conditioned to expect fast and free shipping. According to Deloitte’s 2017 Holiday Survey, 88% of respondents would choose free shipping over fast shipping. However, respondents largely defined fast shipping as falling under a two-day timeframe. If consumers are demanding not only free shipping but free return shipping what is a retailer to do?
Goodbye, holidays. Hello, returns.
Every year UPS identifies a day in January when the carrier expects to return the most holiday packages back to retailers. Last year UPS estimated 1.3 million packages to be returned on National Returns Day alone. This year UPS shared it expects 1.4 million packages returned on Jan. 3, up 8 percent from a year ago. Of the $3.3 trillion American customers spent on merchandise in 2015, they returned 8%, or $260 billion worth, according to the National Retail Federation’s
Every retailer handling returns wants to recoup its losses and this is accomplished by creating a return strategy instead of fixating on strictly processing returns. Depending on your type of business a return can pass through multiple hands before being processed completely. The challenge is to find, or recover, the highest value for each item. Thirty percent of all products ordered online are returned, due to inability to try on or tangibly test the product, but not every return has to be a financial loss.
Turning a necessary cost of doing business into a strategic advantage
Businesses look to restructure and optimize their reverse supply chain processes to meet the influx of e-commerce returns, especially around the holiday season. At one time Best Buy’s returns represented 10 percent of its annual sales, or $400 million, according to CNBC. Retailers can’t escape returns, but they can use them to their advantage. Let’s take a look at some of the costly steps in the return process.
Steps in a typical return process
Returns impact your company’s inventory carrying costs. It’s similar to if your business purchased too much and had an overstock situation. The costs related to originally acquiring the product, reselling it, bringing it back as a return, restocking it, moving it through a secondary market or placing it in a landfill would need to be calculated to find the total cost of ownership. Outlined below are the typical steps in the return process that end up putting a dent in your bottom line.
Carrier surcharges, return label cost and distance product must travel are all metrics to be factored into the reverse logistics return process. The fewer miles that can be put on a product in the return process, the better. If you have a brick-and-mortar location, encourage customers to return their product to the store. This has a higher likelihood of converting that return into incremental dollars.
Receiving and inspection
Whether you are an online retailer or a brick-and-mortar store, there has to be a physical place to return merchandise and employees to monitor, inspect and collect data on those returns. The lack of consistency in the returned products’ physical condition makes returns management more challenging than forward logistics.
Repair or refurbish
If the product needs a simple repair or can be refurbished, the cost must be calculated for and compared to the cost of scrapping the product. Is the repair and repackaging for sale cost lower than completely scrapping the product? Maximizing profit is key.
If the package is unopened undamaged and not obsolete then it can go straight back to inventory. Some retailers charge a 10-20% mandatory restocking fee to offset the cost associated with the loss. Merchandise that can be sold again should enter your inventory as quickly as possible.
Repackaging for sale
An open package of merchandise that is in “as new” condition can be repackaged with the proper materials and resold. Calculate the cost recovered percentage if you are recovering a portion of the profit lost on products that have been returned by consumers. Any dollars recovered are better than dollars lost forever.
Send to supplier
Merchandise can be returned to supplier If they carry defects or if they do not match the specifications of the buyer. Each supplier has different terms and rules to follow that determine the cost savings associated with returning the product to the supplier.
Send to secondary market
Retailers rely on multiple channels that funnel goods to a series of middlemen who in turn send them to discount warehouses or retailers to salvage a portion of the cost. Usually, retailers can get 15 to 30 cents per dollar sending to a secondary market. As an example, Nordstrom sends the items that don’t sell in the mainstream stores to its second-tier chain Nordstrom Rack where they’re marked down for a different customer segment.
This is when you suffer a complete financial loss and the merchandise is damaged or obsolete. Technology that can’t be refurbished often fall in this category. The cost to house scrapped materials or waste management fees are a component of the return processing cost metrics.
Return shipping competition ramps up
As competition increases, shipping and return policies have gotten more liberal. Stores like Amazon and Zappos, that dominate the online e-commerce space, have set the bar high when it comes to the return policy that consumers are conditioned to expect. Zappos encourages customers to order extra merchandise with the promise they can return what they don’t want or don’t use. Amazon has eradicated stressful returns for its customers by introducing a restructured return policy. Amazon will automatically authorize returns which will enable customers to return products without contacting sellers. This means instead of negotiating a discount or suggesting other solutions, sellers will have limited power in the return process. Although, the option to enforce a restocking fee is still available. Also, another option is the opt-in “returnless refunds” service where buyers don’t have to mail back their return.
The reverse flow of shipments offers many challenges and opportunities not present with more predictable forward logistics work flow. Processing inbound return shipments efficiently and rapidly improve financial recovery and lower costs incurred when storing scrapped parts or waste management fees. How do you take a necessary cost of doing business and turn it into a strategic advantage?