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Putting the retail supply chain in reverse gear

Retailers that don’t consider product returns their biggest source of supply may want to rethink their reverse logistics approaches for 2023.

Managing product returns has always been a headache for retailers. The e-commerce boom only increased that pain and pressure. Call it buyer’s remorse, but when customers can’t see, touch and try on merchandise before they buy, they’re more apt to return it. The proof is in the numbers: By some estimates, online return rates average anywhere from 20% to 30%, versus about 9% for in-store sales.

For retailers that were already letting returns pile up in a corner of their warehouse or DC pre-pandemic, the sudden onslaught of online ordering that happened in early-2020 and hasn’t really let up yet was further proof that they needed better returns management processes. E-tailing giants like Amazon are also struggling under the weight of returns. In an article about the company’s “massive returns problem,” CNBC did the math and determined that, based on Amazon’s $469 billion in net sales for 2021 and assuming a 21% product return rate, the company’s return numbers are “likely staggering.”

Along the way, customers have also started demanding, and retailers have been delivering, a better returns experience. They want extended returns windows, faster refunds and easier ways to physically return the goods, for example. Meeting these demands can get costly for anyone running a retail supply chain. In response, more technology vendors are developing solutions that help with everything from receiving and tracking the returned goods to merchandise inspection at the warehouse and issuing customer refunds or credits.

Returns as a source of supply

Even with a boost from technology and automation, the retail supply chain is struggling to absorb the huge backflow of returned goods that its customers are sending back. And once the merchandise makes its way back to the retail warehouse or third-party logistics provider (3PL), there’s still the question of what to do with all of it. “The assumption is that technology will be the silver bullet that solves this problem,” says Debrup Jana, a senior director analyst at Gartner, Inc., “but it won’t be.”

Instead, Jana says retailers should shift their thinking about reverse logistics and viewing the backflow of merchandise not as a burden but as a source of supply. Assuming that just a small percentage of the products are actually defective, broken or unsaleable—and that the average supplier provides about 5% of any company’s stock—returns are actually any retailer’s largest supplier.

“The industry average for retail returns in 2021 was about 16%, which proves that returns is actually these companies’ biggest supplier,” Jana explains. “And yet reverse logistics and returns have been brushed under the rug for a long time. It’s still largely an afterthought that’s handled reactively.”

Retailers that focus too closely on processing returns versus preventing them in the first place have only added to their own reverse logistics challenges. “Solving the problem will require a completely different approach that’s centered on prevention,” says Jana, “versus just blaming the consumer for having to return something.”

Here’s where technology can help.

Virtual dressing room applications, for example, let consumers use their own uploaded photos to “try on” apparel. This helps them check for look and fit before hitting the buy button online. Similar platforms can be used to see how furniture looks in specific areas of your home or visualize what that new pair of glasses will look like on your face.

Tony Sciarrotta, executive director of the Reverse Logistics Association, says these efforts also help retailers operate more sustainably. “Software that helps you size things better or envision what that new dining set will look like in your house can help stem the flow of returned merchandise,” says Sciarrotta, “and in turn, reduce the amount of waste that’s piling up in the landfills.”

Supporting the regenerative supply chain

A model that factors in all of the business activities that go into satisfying customer demand, ASCM’s Supply Chain Operations Reference (SCOR) model helps companies assess and improve their supply chains.

In September, the organization released SCOR DS (“digital standard”). According to Peter Bolstorff, ASCM’s executive VP, the new SCOR DS modernizes the open access framework to include resilience, sustainability, omnichannel and other modern supply chain concepts. It also helps companies address their returns challenges with an eye on creating a more “circular” supply chain—versus a one-way, outbound path—returns included.

“Our main objective was to create a model for 2030, where people and organizations could see themselves in their supply chains inside the model,” says Bolstorff, who encourages retailers to focus on orchestrating circular supply chains that support effective planning from the return standpoint. “Whether it’s a product or some other asset,” he says, “think about what you need to do to be able to efficiently and effectively bring it back in, repair it, restock it and resell it.”

Offered at no charge, the SCOR DS model provides a compass that organizations can use to standardize and improve all aspects of their supply chains. “It fuels innovation,” says Bolstorff, “so I would challenge people to explore that idea and use it in their own operations.”

This is vastly different than the retail supply chain of old, which was largely focused on bridging a linear path between supplier, retailer and end customer. With an average of 16% of outward bound products now coming back to retailers, smart companies are coming up with new ways to manage the “right-to-left” flow as well as the traditional, “left-to-right” freight movement.

“It’s about organizing the supply chain in a continuous ay,” says Bolstorff. “It’s one thing to be able to forecast demand, but retailers also have to be able to concurrently forecast supply capacity in order to orchestrate the synchronization of the regenerative supply chain. The SCOR DS model supports that regenerative supply chain.”

Rethinking return policies

Sciarrotta says retailers are also rethinking their return policies, with ZARA being among the first companies to start charging its customers to return their purchases. Those who dropped the returns off at a store receive full credit, but customers who ship the goods back have to shell out a few bucks for that option. “We’ll probably see more of this happening,” Sciarrotta predicts.

Some of the push to improve returns management is coming from the retailers’ suppliers, who used to take back 75% or more of the merchandise from retailers, according to Sciarrotta. The other 25% was usually liquidated. Now, the same vendors are giving retailers allowances for disposing of the goods instead. “They’re playing a real game with their environmental, social and governance (ESG) scores and other sustainability [metrics],” says Sciarrotta.

In response, retailers have started reassessing whether they even want the products back, or not. Consumers are often told to just keep low-value items that would cost the retailer more to ship back, process and try to resell. This puts the onus of disposal on the consumer. “That’s not a very environmentally-friendly reverse logistics approach,” Sciarrotta points out. “It’s also not sustainable, but unfortunately it’s happening more and more.”

The burgeoning secondary market

When Zac Rogers began analyzing the secondary market—dollar stores, salvage dealers, factory stores and the like—in 2008, the total market size was about $308 billion. Last year, the number reached $689 billion, or roughly 3% of the total U.S. gross domestic product (GDP). “The market has more than doubled over the last 13 years,” says Rogers, assistant professor of supply chain management at Colorado State University, “and I wouldn’t be surprised if it doubled again over the next 13 years.”

Credit the overflowing reverse logistics pipeline with driving at least some of that growth. This year, for example, the gradual easing of pandemic pressures created a lot of overstocked inventory at the retail level. Rising interest rates, inflation fears and a drop in consumer spending hit all at once, leaving retailers holding the inventory bag.

“A lot of those goods were stuck with nowhere to go,” says Rogers. For help, retailers turned to secondary outlets that by the end of 2022 were also dealing with a “record number of overstocks,” he says. The cycle repeated itself as salvage dealers and outlet stores offloaded some of the stock to their own secondary market outlets, many of which were also already swamped, according to Rogers.

As retailers work to solve this immediate challenge and look for ways to avoid it in the future, Rogers says more of them will probably use data and technology to better understand what inventory they have on hand. To stem the flow of returns, however, he says retailers will have to cumulatively start rethinking their longstanding “free and easy” return policies. Much like a single airline can’t lower fees without the rest of its competitors at least trying to follow suit, at least one large retailer will have to be a first-mover in this area.

“I don’t think retailers are going to be able to put that genie back in the bottle. I teach classrooms of Gen Z students who have grown up in a world where you can always just pull out your phone, select three different options, keep one and then drop the rest of them off at a Kohl’s or UPS Store,” says Rogers, “and all for free.”

The new returns mindset

Like Jana, Vincent Crimaldi says a mindset shift may help willing retailers get a better handle on their reverse supply chains. A Capgemini VP for consumer products, retail and distribution, Crimaldi says returns can be an especially good source of goods at a time when pandemic-driven supply chain shortages are still lingering.

“If a product is scarce and if 20% to 30% of the goods sold online are being returned, you really need to take care of that product not only when it’s on its way out to the customer,” says Crimaldi, “but also on the way back.” Retailers that extract maximum value from those returned products—be it via resale, refurbish, liquidation, donation or another means—can effectively transform returns into assets versus just burdens.

“Look at returns as another source of supply,” Crimaldi recommends. “You may need to refurbish that product and it does take time to determine why the product was returned. In the end, higher-value items in particular can translate into significant value when they can be received, inspected, restocked and sold as quickly as possible.”

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