How to Maintain Maximum Profitability During the High-Return Season

How to Maintain Maximum Profitability During the High-Return Season

In Amazon’s brimming warehouse in New York, dozens of employees sort, scan and pack tablets, fitness bands, headphones, shoes, books, gadgets – almost anything consumers bought on Black Friday deals but then returned.

The returned items will be put for online auction, recycled, donated or sent back to wholesalers.

Making the return process easy for customers, which is what retailers do, is very important from a customer service and reputation perspective.

But do retailers gain any advantage by accepting returns?

According to Peter Sobotta of Return Logic, a high-touch returns processing enterprise solution, retailers have multiple solutions in place to handle their customer returns. The majority are handled by third party logistics companies, but a portion of returns are handled internally and sold at brick-and-mortar chains, resold online or are returned to the vendor.

An unnamed source once overheard this referred to as an “accidental business” by a staff member at Amazon.

This internal process, in conjunction with third-party handling, exists to extract the highest recovery value possible and reduce some of the financial sting that comes with a return policy.

When a brand announces a product recall, it doesn’t make everyone in the warehouse jump for joy.

To plan for these types of situations, many ecommerce businesses also explore tight inventory control and returns management to make profits and improve efficiency.

And that’s how companies scale reverse logistics for the post-holiday influx.

The impact of this strategy on the bottom line can be a huge one considering that:

  • More than 20% of returns happen during the holidays (source)
  • Consumers return about 9% of total merchandise sales (source)
  • Consumers are projected to return about 30-33% of bought goods this holiday season (source)

Retailers want to liquidate products of lesser value (i.e. returned items). With reverse logistics, you can recover, inspect, test, dispose and resell the returned goods.

The Supply Chain Impact of Returned Goods

Gartner called returns “the ticking time bomb” that threatens retailers’ profitability

And according to research conducted by Intermec, the supply chain technology stalwart, “more than 52% of distribution center managers don’t have the ability or resources to determine whether returned items should be sent to the vendor, moved into inventory, or discarded.” The study also revealed that “44% of distribution center managers consider returned items as ‘pain point’ in their operations.”

So, if the supply chain is unprepared to accept these goods, they’ll be stored and unrecognized as current inventory in the warehouse, perhaps only considered as available inventory at a later date during physical counts.

That’s a pile of avoidable waste in the making.

A report by Reverse Logistics Association explains that managing the “return and repair” process accounts for 10% of total supply chain costs. But if the supply chain gets stuck (due to some inefficient processes), it can compound the cost and reduce profit by 30%.

Deloitte & Arvato’s research and data analysis found that organizations face the following obstacles to properly manage reverse logistics:

Obstacles to reverse logistics
Image via: Deloitte

Usually, no one takes responsibility of reverse supply chain operations, so they fly under the radar – until the financials take a hit. Establishing a standard procedure for handling the returns can make reverse logistics less challenging for companies.

For instance, Estee Lauder Companies Inc. used to dump about $60 million worth of its products into landfills annually. But after setting up a reverse supply chain, it was able to cut down the volume of destroyed goods by 50%.

Also, the company has created a $250 million product line from the returns goods flow according to a report. It now represents the third most profitable product line within the firm. Who could have imagined the company making millions of dollars out of returned items? Simply fascinating.

Therefore, reverse logistics is a critical component of supply chain that is worth developing.

A UPS report says that high-tech manufacturers without a well-developed reverse logistics process could be losing more than 50% of returned inventory value since most of the returned products can be sold in secondary markets.

In addition to missed revenues, retailers could also face penalties and fines if they do not have an efficient reverse logistics process in place when it comes to laws and regulations.

For instance, CPSC (US Consumer Product Safety Commission) announced in a press release that Meijer Inc., a Michigan-based retailer, was fined $2 million to resolve allegations that it introduced recalled products into commerce knowingly. With a reverse logistics plan, the company would have been in a better position to handle recalled items.

Using Reverse Logistics to Your Advantage

Reverse logistics is becoming increasingly important as product life cycles get shorter and shorter, particularly after the holiday season. Without an effective returns policy, retailers may be opening their business up to unnecessary liability.

Typically, most of product management is focused on the volume-shipping aspect or the introductory phase of the product life cycle. But leading businesses are broadening their perspective by focusing on managing returns.

Rather than viewing returned items as a mere cost center, you can streamline reverse logistics to get the most of the holiday return influx. A recent study showed that when businesses invested in improving reverse logistics processes, they saw a 12% increase in customer satisfaction and 4 percent decrease in cost.

Below are some measures you can take to minimize waste and protect your bottom line:

1. Have a Streamlined Repackaging Process

Inbound Logistics pointed out that repackaging and repairing a product for resale in a secondary market can help retailers to recoup as much as 25% of the original retail cost. But keep in mind that repairing is not needed for items that look fine on the inside, but have box damage on the outside.

The secondary market is a huge part of the global economy and by now probably over 3% of the U.S. economy,” says Dale Rogers, professor of logistics and supply chain management at Arizona State University. “And there’s a ton of growth in the sector. I mean, how many Rosses and Marshalls and 99-cent stores have popped up … in the last 10 years?

The returned products end up retaining much more value if the decision to liquidate inventory is made quickly. Also, refurbishing the returned items, rather than neglecting them to be scrapped, retains some of their value and benefits the environment. Retailers selling electronics can easily refurbish and resell 95% of retail returns.

Most ecommerce businesses accept returns via parcel, and stamp a return shipping label in the delivery box. Some are also investing in sturdier packaging to ensure the product remains in good condition both on the inside and outside through shipping and returns, and is able to survive a longer transportation cycle.

You can work with many sectors in the secondary market after taking these measures. Some examples include online auction houses, salvage dealers (buy in bulk and resell small quantities), and factory outlets (if you own any).

Returned items sold in the secondary market

 Image via: JOC

You can work with many sectors in the secondary market after taking these measures. Some examples include online auction houses, salvage dealers (buy in bulk and resell small quantities), and factory outlets (if you own any).

2. Create a Strong Return Policy

A company’s return policy has a profound impact on the efficiency of reverse logistics.

If you are too generous, you can attract customers but will incur major expenses. If you are too stingy, you can keep costs low but at the expense of hurting customer relationships. Likewise, making the returns process difficult or confusing for the customer is not the right approach.

Since customer experience is cyclical, the way returns are handled makes a real difference in how people feel about your business. With a clear return policy, you can build customer trust and reduce the hassle of returning items.

Creating a standard policy around who can return items, and under what circumstances, is the foundation of any reverse logistics plan.

Some retailers may decide that rather than accepting all products as returns, there are situations when the consumer, retailer, or even logistics provider can donate or dispose of the product, and be remunerated later.

When you do a good job at accepting and managing returns, you can improve your customer loyalty and, ultimately, sell more of your goods directly and in secondary markets.

Craig Adkins of Zappos told Fast Company that

consumers with the highest returns rates are their best customers, because they spend the most money and are the most profitable customers.

3. Consider Third Party Logistics

Perhaps you’re not in a position to invest in integrating the best reverse logistics processes into your company. In that case, you can outsource this part of your supply chain like many large companies do.

Third-party logistics (3PL) providers can reduce the cost of returns management, consolidate shipments, and optimize the asset and disposition recovery process. They may also offer repackaging services that involve repackaging returned items onsite, which will speed up the journey back to retaining value.

This strategy eliminates one aspect of transportation back to the manufacturer. By utilizing existing logistics networks, product returns systems and liquidation partners, 3PLs can create a protective barrier against forces that increase your potential liabilities.

Inbound Logistics revealed in a case study how Ryder, a third-party logistics provider, handles returns for Philips Consumer Lifestyle:

Philips Consumer Lifestyle Returns Handling

Image via: Inbound Logistics 

An experienced 3PL provider should understand:

  • What processes can be used to maximize the value of returned items downstream.
  • The impact of returns on distribution centers and financials of the business.
  • Existing operations that can be leveraged to provide inbound transportation support.

The whole idea of using a 3PL provider is to execute the returns process more smoothly.

Take Advantage of Technology

There are many enterprise software solutions available for companies of all sizes that enable you to track and address returns reasons and automate the handling of returns.

For instance, businesses can use Shopify Plus to handle high order volumes of their store during the holiday season. And you can connect the store with any reverse logistics platform to create a seamless, integrated solution. Also, you can use the platform’s restful APIs, SDKs and App store to automate returns management.

Software can generate returns data that can be used as market research for insights into returns patterns and customer behavior. For instance, if the data suggests that a product was returned due to poor design, the 3PL or logistic department can be instructed to send in comparable items.

The more quickly items pass through the system, the more value will be recaptured.

Time-to-cash is the key driver of most reverse logistics operations. How effectively you minimize it greatly depends on the data developed around returns.

Enterprise software needs to be integrated with a reverse logistics platform in advance, so that returned items are managed for the highest recovery value as well as for speed. So, when goods like apparel make their way back into full-value inventory before they fall out of fashion, they steer clear of the clearance rack.

Final Thoughts

Regardless of your approach towards reverse logistics, remember that it is an ongoing process that requires vigilance.

Getting value from those holiday returns will depend on how efficient you are and the processes you have in place to retain value of all returned items. The tips mentioned above will help you to squeeze more revenue out of both sold and returned items.

What are your thoughts? How are you managing the post-holiday returns influx? Feel free to leave comments.


About the Author

Dan Virgillito is a storytelling specialist, blogger and writer who helps digital startups get more engagement and business through online content.