Transportation Trends and Best Practices: Many happy returns

We’re all familiar with the saying “may you live in interesting times.” Depending on when it’s said, the proverb can be interpreted as either a blessing or a curse.

There’s also the proverb—many happy returns. It’s usually intended to wish someone a long string of future birthdays. However, many happy returns is now emerging as the proverbial blessing and a curse in the supply chain.

“Most companies look at returns as a necessary evil [curse] and don’t treat them much better than you might expect,” says Nick Vyas of the Marshall School of Business at the University of Southern California. But he insists that returns deserve more respect than that. In fact, returns and returns policies are actually an open door to ever higher sales and profits (blessing), especially in e-commerce. At USC, Vyas is the Kendrick executive director of the Global Supply Chain Management Institute and associate professor of clinical/data science and operations. Yes, we do live in interesting times.

The returns profile

Given the dislike many in the supply chain have for returns, there should probably be a scapegoat for making them acceptable in the first place. Some give that honor to Zappos, the e-commerce shoe merchant that has been a part of Amazon since 2009.

From its start 10 years earlier, Zappos worked hard to eliminate any stigma to returning its shoes. In fact, the company encouraged customers to order an array of shoes and send back, for free, whatever didn’t fit or the customer didn’t like for whatever reason, no questions asked. It was just a necessary part of e-commerce transactions.

Zappos was right. Returns especially made sense when it came to selling shoes online. Even now, with 20 years of experience, buying shoes without trying them on is a risk many are unwilling to take. An easy returns policy helps to lower that barrier. But it took time and was not always an easy sell.

A few years after Zappos was founded, there was a panel discussion at a supply chain show about the emerging e-commerce business. One of the participants said, with unrestrained disdain, that his wife would certainly order many pairs of shoes with the full intent of keeping only one
pair. “There’s no way e-commerce can survive that,” he proclaimed.

He was wrong. Very wrong. In fact, while we have not fact checked this claim, he is more than likely today happily returning items he has bought—and not just his wife—at both brick-and-mortar retailers and from e-commerce companies. It’s just inevitable. We all feel entitled on this one. That requires a simple returns policy. If that’s not the case, we’ll simply buy from somewhere else that will meet our expectations. And we do.

“Ultimately, returns are the voice of the customer,” says Daryl Bush, senior director of supply chain services at Kuecker Pulse Integration (KPI). “They want what they want when they want it. If it doesn’t work out for whatever reason, they want either their money back quickly or a new item just as quickly.”

To say that returns has exploded is a bit of an understatement. Zac Rogers, assistant professor of supply chain management at Colorado State University, has the numbers to prove it. In 2020, he says, the value of returns and overstocked goods was $643.9 billion. That’s 3.1% of GDP.

Rogers has been tracking this since 2008 when the number was a bit more than $300 billion. It cleared half a trillion dollars in 2015. He expects 6% annual growth in returns for the foreseeable future.

Because we’re now in the heart of the holiday returns season, Rogers estimates there will be roughly $110 billion in returns to kick off 2022. Save the confetti. “Just as companies, and especially retailers, have been overwhelmed by demand for their products, they will be overwhelmed early in the new year with returns,” says Rogers.

E-commerce is to thank for more than its fair share of that growth in returns. Rogers and others estimate that brick-and-mortar returns are about 6% of sales. But the e-commerce number is on either side of 20%, depending upon who you ask.

That said, e-commerce grew a bit more than 40% in 2020 with the pandemic rerouting retail sales from brick-and-mortar. Most experts put e-commerce at roughly 15% of all retail today, several years earlier than most once predicted. Rogers says that will rise to 25% by 2026. It doesn’t take much to feel the force of the returns storm that’s approaching.

Are returns inevitable?

“We live in a world of unlimited returns, especially in retail e-commerce,” says Rogers. “Most companies are trying to differentiate themselves with superior customer service, and returns are an element of that. In fact, liberal returns policies are part of the customer culture today,” he adds.

Looking at it from the retailer’s perspective, Bush of KPI says “returns are a devil that’s required in retail today.”

Not everyone, however, entirely agrees that the current volume of returns is inevitable. Instead, some say returns levels can and should be managed.

Tony Sciarrotta, executive director of the Reverse Logistics Association (RLA), pioneered the elimination of returns in his previous career at electronics supplier Phillips. Starting in 1999, he led a major company initiative that reduced returns from 12% to less than 4% in just five years. Those were significant numbers with sales of $2 billion annually in just North America. He says that is entirely repeatable today.

Jim Kuecer, chief commercial officer at KPI, agrees. “Retailers need to figure out why returns happen in the first place,” he explains. “Did this perfectly good product become a return because of the customer or the retailer?”

According to the experts, there are plenty of potential disconnects between the customer and retailer, especially in e-commerce. “It’s often the difference between the 2-D web site and the 3-D world of the product itself,” says Sciarrotta. Do the colors match? Is the product pictured the same as what ships? Are sizes consistent?

As head of RLA, Sciarrotta still advoctes programs that reduce returns rates. Many of them address discrepancies between the 2-D and 3-D worlds of e-commerce. Additionally, there are companies such as Newmine that advocate a proactive, preventative approach to returns through deep data analytics. The company’s approach is to use returns-relevant data to prescribe corrective actions for retailers so they can remediate issues that lead to returns in the first place.

Navjit Bhasin, founder and CEO or Newmine, offers five key benefits of reducing returns to start.

1. Every $1 million return reduction adds $500,000 to the bottom line.
2. Improved margins due to fewer markdowns.
3. Cost savings in labor, shipping and DC space.
4. Increased brand loyalty as a direct result of better buying experience.
5. Enhanced environmental sustainability.

By the way, those five also generally apply to improved returns management. That is certainly something worth considering.

There’s also the matter of returns policies. Retailers want customers for life. Eddie Bauer is an example. So is Amazon with its customer-first approach. In fact, the e-commerce giant has even taken to refusing some returns. Instead, it tells the customer to keep the item as the company credits the person’s account.

“Keep it” is about as simple a return policy as you can find. And while it is not the answer in most cases, it is the epitome of the easy-to-understand return policy that customers like and need.

Facing the problem(s)

“Not only are returns now an essential part of retail, they have to be returned to sellable inventory in warp speed,” says KPI’s Kuecker.

Adds Kim Baudry, global market development director at Dematic, “In general, we need to manage returns more efficiently. We need to get more returns back into stock. And we need to do it more quickly.” She continues to say that each company’s corporate strategy must include returns. We don’t have the luxury of thinking of returns as the moral equivalent of a four-letter word. “It is not a topic to talk about and then walk away from,” Baudry says.

Getting to that point will not be easy. Or is it? The solution, suggested by both Rogers and Vyas, is alarmingly simple. Make reverse logistics as efficient and streamlined as forward logistics. “Companies can no longer afford to focus on the supply chain only from source to store and to the detriment of the supply
chain from the customer back to the distribution center,” says Vyas.

Both Vyas and Rogers think this is so important that they have made reverse logistics a major focus of courses they offer to both graduate and undergraduate students. While the cavalry may be coming, it hasn’t exactly crested the hill yet.

This is a good point to mention that returns is often the shorthand nomenclature for all of this supply chain activity from the customer back to the DC. However, it is better to call this process what it is—reverse logistics. It is a much larger proposition than simply inspecting, classifying and processing returns within the four walls of the warehouse or distribution center.

As Jeremy Davidson, Fortna’s vice president of enterprise accounts, points out, reverse logistics touches multiple functions in a company from merchandising and marketing to finance and distribution and even procurement and manufacturing. Quite simply, reverse logistics involves a village. And that means managing reverse logistics requires all of the processes and steps are fully integrated with these other corporate activities. Fail at one point and it will affect another. Despite
the behavior at many companies, returns are not, in fact, an island.

Those points of engagement are also both inside and outside the company. Reverse logistics requires a timely return of unwanted inventory to the processing center by the most efficient mode possible. It then requires efficient reassessment and classification for proper disposition.

That final step ranges from returning an item to the company’s inventory or sending it on to factory outlets or dollar stores or even salvage dealers and online auction houses. In all, Rogers tracks eight different disposition destinations beyond the company’s DC.

And as he points out, there’s real money here in the disposition of returns beyond the DC. Salvage dealers alone handle more than $250 billion worth of unwanted product. Even charities account for almost $17 billion of returns disposition.

For all of the challenges with returns, they have not been completely neglected. There’s just plenty of room for improvement.

Sciarrotta says only about 50% of returns actually go back into the typical company’s inventory. There are plenty of possibilities for non-restockable returns from damage to fraud.

And while few can do it today, Davidson says it should take no more than 24 hours from receipt of a return until it is available for sale again. “The heavy lifting of defining and managing reverse logistics as a process is essential. And there is no silver bullet,” adds Davidson.

That, Vyas knows so well. He breaks out retailers’ success at managing returns this way. About 20% are great at handling returns. Another 60% are in survival mode but are looking for solutions (to varying degrees). The final 20% of retailers have never made an attempt to solve the problem.

Davidson sees the breakout of leaders and laggards here much the same way. He elaborates on not just where different companies are in this journey, but identifies blind spots that hold them back.

Davidson says about 35% of companies see reverse logistics as the cost of doing business. They have a desire to do something that’s more effective but have a major blind spot when it comes to assessing true costs of handling and transportation. Just moving forward here is often more than they can manage to do.

He says about half of all retailers are beginning to embark on “the journey of getting reverse logistics under control.” These companies understand they have a pain point—lack of speed at moving returns back into the pool of saleable inventory. Their greatest challenges, Davison says, are not recognizing the risk of not doing enough and the complexity of the challenge as well as the risk of not going far enough to solve the problem.

Then there are the 15% that are the best practice companies, says Davidson. They have a strategy for reverse logistics and want to be a leader in the reverse flow that Rogers and Vyas mentioned. Many of these companies have a reverse logistics czar who reports to the COO, adds Davidson. But they, too, typically have blind spots. One is not realizing they are still learning about reverse logistics. A second pain point is not doing sufficient testing and proving of solutions to becoming a leader here.

We can see many retailer leaders in any given segment, whether it is home goods, outdoors/sporting goods, footwear or apparel, that view returns as an integral part of the brand promise, experience and lifestyle equation to customers. They answer the question “do you make my life easier,” in part by having a strategic returns vision and commitment, says Davidson.

He says these companies view customers as partners that the company has an obligation to make each sale more than a transaction. Several attributes should be noted here. “First, these brands make it simple to return items and replace them for the customer whenever possible. Second, they’ve actually made returns a strategic component of its growth strategy,” adds Davidson.

At the other end of spectrum, says Davidson, are companies that focus on managing returns with its vendor rather than focusing on the customer. “The marked focus here is on defining returns success by meeting the contract terms with its vendor that allow a certain amount of product to go back to them. In other words, it is all about fulfilling their service level agreement (SLA) terms. The customer just is not part of that equation,” Davidson adds.

Outsourcing returns

Regardless of your starting point here, returns are not likely to become less of a concern any time soon. Just a couple of years ago, there were some who thought the solution was to limit returns as an option. Even eliminate them altogether. That pipe dream didn’t go very far, and today is clearly not viable.

While some companies want to handle returns internally, others rely on third-party logistics providers to do it for them. Early indications are that there’s a changing landscape when it comes to 3PL options.

In fact, Baudry of Dematic says the management of returns is entering a new phase. Increasingly, some companies are realizing they no longer have to go it alone, but can build partnerships with companies that specialize in reverse logistics. That helps to take the pressure off those companies that have so far been unable to get a handle on returns.

Baudry sees more reverse logistics specialty companies in the future. This is a shift from the large 3PLs that dominate reverse logistics today. The future, she says, is smaller 3PLs that handle products for specific brands. In addition to inspecting and classifying each return, the 3PL will clean and categorize each for final disposition. The end result is a proper disposition of each return rather than a haphazard, what-does-it-matter approach.

“The costs of handling returns properly is too much to ignore,” Baudry says. “Companies are at the point where it is too easy to get a black eye for mishandling them. It’s not only from the standpoint of lost revenues, but also from customers’ perception of how poorly handled returns affect the environment.”

Baudry is not alone here

Rogers also thinks the large companies are about to be joined by many small 3PLs that specialize in a particular product, shoes for instance. He says this development is entirely due to continued increase in returns volumes, making specific product categories large enough to support a specialized 3PL business.

Large returns 3PLs, continues Rogers, are being supplemented by firms focusing on the analytical aspect of returns. The idea is to help companies optimize the disposition of their products to maximize value recovery.

While Rogers’ and Baudry’s projections about new 3PLs are forward looking, massive returns volumes are here now. And the challenge is exacerbated by the fact that volumes are either close to or are already at a critical mass that negatively affects a company’s bottom line. Not to mention the integrity of the brand. If the decision is to handle returns internally, now is a great time to move ahead.

Working the problem internally

For those companies that want to manage their own returns, there are many options for improvement. They range from new processes to automated equipment and software.

Bush of KPI is quick to say the key is first understanding the profile of returns and how they have been processed. Then it’s a matter of evaluating how that can be improved by eliminating as many touch points and steps in the process as possible. That will inevitably lead to new handling equipment, much of it automated.

But just as Baudry and Rogers talk about partnerships with 3PLs, Bush talks about long-term partnerships with solution providers. “It’s a daunting process to design a new system for returns. But a strong solution can be developed with the right relationship between both parties. It’s all about building for the future,” he adds.

Vyas of USC puts it this way: “We have had tremendous innovation in forward logistics for years now. It is now time for reverse logistics to move to innovation at the same rate,” he says.

Enter sustainability

As it turns out, the entire returns proposition just became more complicated. And we’re not talking SKU proliferation here. Sustainability is the new variable that has become almost surprisingly important in a very short time. And it’s a little complicated. For instance, Vyas estimates that as much as 30% of returns, primarily apparel, go to landfills. Not much of that is highly visible.

However, it is well known that after fast fashion has been worn for less than a year 70% or more of it goes to landfills. That is both a sustainability issue and a brand integrity issue. Neither is positive.

Brand integrity is another rising issue with returns, says Davidson of Fortna. Just as retailers want a customer for life, brands of all goods do too. And there is no denying that increasing numbers of consumers are demanding that a brand represent the best in issues from environmental concerns to human rights. Perhaps needless to say, it does not reflect well on a brand to be found in a landfill.

“Going forward, sustainability and brand integrity of all returns will be an issue,” says Vyas. “We need to develop reverse logistics scenarios that allow all returns to be recirculated back into the economy.”

Clearly, returns are a dilemma. “Consumers have trained retailers to expect returns. Now it’s up to retailers to develop solutions that answer this day-in and day-out challenge,” says Bush of KPI. “Nothing is out of bounds anymore.”