Managing Retail Returns: The Good, the Bad, and the Ugly

Tags: 3PL, Reverse Logistics, Retail, Supply Chain Management

Illustration of happy, sad, and angry customers

Retailers have to cope with all kinds of returns—from apparel that just didn't suit the customer, to expired products that are no longer saleable, to recalls endangering public safety. Here's how retailers handle this range of returned goods to recover maximum value.

The forward side of retail logistics spends September through December moving high volumes of goods into stores and e-commerce distribution centers. For reverse logistics, however, it's all about January, February, and March.

That's when the good, the bad, and the ugly post-holiday returns hit: damaged, unwanted, outmoded, leaking, spoiled, or counterfeit merchandise that pours back into retail stores and returns consolidation centers, accounting for 40 to 60 percent of the year's returns. It is up to retail's reverse logistics operations to separate the wheat from the chafe, performing triage and processing it all to reduce costs and mitigate loss.

Retailers are devoting more attention and resources to reverse logistics as they seek to extract as much value as possible from returned goods. The average retailer's reverse logistics costs for consumer goods are equal to an average 8.1 percent of total sales—a figure which, unlike forward logistics, includes the value of the goods.

At the same time, trends such as omni-channel retail and tighter regulation are making reverse logistics increasingly complex. Better use of data, a more end-to-end perspective, and prevention programs are helping to reduce return rates for some operations, but there is still room for improvement.

Many Hapless Returns

Imagine opening a returned package and finding a piñata where a PC should be, or peering inside a game console to discover all the chips replaced with scrap metal. Those are some examples of fraudulent returns recently discovered by retail returns personnel.

Even when consumers return legitimately purchased merchandise, retailers are faced with challenges such as product malfunction, missing parts, damaged packaging, and expired perishable merchandise. Add recalled product, end-of-season merchandise, and overstock, and the sum is a substantial volume of goods moving to a variety of final destinations. It takes time, space, and training to ensure a return is authentic, determine what to do with it, perform any required repairs or repackaging, then send it on its way.

Despite that back-end complexity, it is critical that retailers make returns easy and seamless to the customer.

"Over the past few years, most retailers have come to appreciate that creating a good return experience offers a competitive advantage," says Charles Johnston, director of repair and returns for Atlanta-based home improvement retailer The Home Depot.

That's a tricky line to walk, however: The more information retailers can collect from a customer, the better they can head off fraud and nail down the reason for the return. The more they know about the reason, the better their decisions about needed repairs and improving future procurement.

But consumers want a fast and easy returns process. "Some retailers that significantly tightened their return policies drove customers away," says Johnston.

And while forward logistics is all about pristinely packed cartons shrink-wrapped onto well-planned pallets and moved out to stores and customers along pre-set routes, reverse logistics is inherently more complex—and sometimes even messy. The variability of properties and terms surrounding each item creates many potential dispositions: return to manufacturer, transfer to another store, refurbish, repackage/re-kit, liquidate, disassemble and reuse, recycle, donate, or just plain throw away.

A package of cosmetics that looked shiny and appealing on its way into the store, now returned, may be unopened and good enough to resell, or it may be eligible to be re-kitted into a bonus giveaway. But it might also be near expiration and suitable only for clearance, or past expiration and classified as hazardous waste that must be destroyed in a prescribed way.

"The same capabilities used in the forward supply chain can't be leveraged in reverse logistics," notes Steve Dollase, president of Winston-Salem, N.C.-based technology provider Inmar Supply Chain Services. "Reverse logistics requires different processes, technology, capabilities, and expertise. It's more of a network model."

In the 1990s, an industry study documented that significant savings could be gained from a consolidation center model, inspiring many larger retailers to adopt this strategy. While stores may engage in some light sorting and documentation, most returns are processed at a handful of centralized facilities dedicated to the task.

"By reducing administrative and transportation costs, consolidation cuts reverse logistics costs by 40 percent on average," says Johnston.

Some reverse logistics operations are now being co-located with forward logistics facilities to easily move resalable goods back into stores—for example, transferring lawn chairs from Wisconsin to Georgia as the seasons change. "Performing fulfillment from a consolidation center into the forward supply chain is a capability that did not exist years ago," says Dave Vehec, senior vice president, retail logistics for Pittsburgh, Pa.-based product lifecycle and reverse logistics provider GENCO.

3PLs Provide Value

While some original equipment manufacturers (OEMs) still take product back, in most cases retailers and third-party logistics (3PL) providers manage returned product. That strategy eliminates one leg of transportation back to the OEM, and puts a surprising array of companies in the refurbishment business: Retailers including Best Buy and Home Depot, and even 3PLs such as UPS and Ryder, employ technicians to repair returned electronics, through allowances from the OEMs.

"Businesses can cut days out of the returns process if they don't connect to another party," notes Carrie Parris, director of corporate strategy for Atlanta-based logistics provider UPS.

The big focus is on reaping the most value from the return. The secondary market—including outlets, salvage centers, and auctions—has blossomed to a $400-billion industry. Retailers typically recoup 12 to 25 percent of an item's original cost there, versus less than two percent from recycling.

With returns amounting to 8.1 percent of sales, "recovering 50 percent by sending a product back to the vendor or selling it puts four percent back on the bottom line," says Curtis Greve, managing director of the non-profit Reverse Logistics & Sustainability Council.

Several trends are adding to the complexity surrounding retail returns. Topping the list is the overall economy. Swings in product prices and transportation costs constantly change the threshold at which it is worthwhile to pour additional resources into trying to recoup value from a returned product.

Second is omni-channel consumers' expectation that they can interact with a retail brand the same way, whether they are in a store, online, talking to a call center, or interacting via mobile device. Retailers have been scrambling to bring siloed back-end systems and processes into a centralized IT environment to fulfill this omni-channel expectation.

Many omni-channel retailers find it necessary to create workarounds to manage reverse logistics. Women's apparel and home decor retailer Soft Surroundings offers some goods in each of its channels—e-commerce, stores, and catalogs—that aren't available in all. "If we allow omni-channel sales, we need to allow omni-channel returns," says Laura Barrett, the company's vice president of operations.

The company attempted to address the issue by enabling store associates to access separate systems to process each type of return. But it became clear that it isn't easy to improvise within the physical reverse logistics supply chain. For example, if a customer purchases a chair online, then returns it to a store that doesn't sell furniture, Soft Surroundings introduces the return into store inventory. The company plans to develop a better long-term solution.

Retailers with long-established consolidation centers that are separated by channel are also working to merge those facilities. "Home Depot's centralized returns processes are only a few years old, so we're well-positioned to effectively unify into a centralized returns process," says Johnston.

"Our online and brick-and-mortar channels need to operate as one," agrees Brad Dockter, senior group manager, non-retail supply chain, for big-box retailer Target. "Integrating two different channels into one streamlined operations, and reduced the cost of returns by leveraging return to store."

The rise of e-commerce has also meant an overall increase in return rates, particularly for apparel, home goods, furniture, and other items best experienced in-person. Some customers buy several similar items with the intention of keeping only the one they like best.

Most e-commerce retailers also offer returns via parcel, often including a return shipping label in the box. To ensure the product remains in good condition through shipping both to the customer and on the return, some retailers are investing in sturdier packaging that can handle a longer transportation cycle.

"Retailers are also making repackaging more intuitive for the customer," adds Lance Wallin, vice president, product care, e-commerce solutions, for packaging materials maker Sealed Air.

Reduce, Reuse, Respect Regulations

With 400 million electronic items ending up in landfills every year, a growing number of jurisdictions are imposing new requirements on tracking and safely disposing of certain goods and materials. Consumer electronics are a major focus, but other products are included in the rules as well.

"For many years, the Environmental Protection Agency (EPA) had not defined hazardous waste for the reverse logistics sector," says Johnston. But that changed over the past few years, prompting Home Depot, Walmart, and other companies to work with the EPA to clarify regulations. Under the statutes, retailers are responsible for executing and documenting their good faith efforts to ensure they properly dispose of the governed goods. Stepped-up enforcement of laws regulating hazardous materials such as herbicides is driving increased spending on specialized waste-removal services.

Consumable goods are subject to their own set of requirements and processes, such as managing expirations. Many food manufacturers and retailers set up local donation programs to deal with saleable returns and procedures for destroying expired product.

Recalls represent an especially complex facet of the reverse logistics supply chain. They require fast action, detailed reporting, and processes that ensure recalled product doesn't enter the secondary market. The average retailer handles recalls infrequently enough that it can be challenging to keep effective programs in place. "Most retailers do not have adequate capabilities to manage recalls, so they often outsource the process," says Inmar's Dollase.

Revising Reverse

Retailers are embracing a number of new strategies to maximize value from their reverse logistics efforts. These include:

  • Outsourcing. Many retailers, particularly larger chains, consider reverse logistics outside their core competency, so they outsource part or all of the function to 3PLs and specialists.

    "Reverse logistics is not a core competency, it uses different software, it's hard to get systems help, and nobody in the supply chain wants to run a returns center," notes Greve.

  • A holistic perspective. "A product's lifecycle used to be cradle to grave, but the new concept is cradle to cradle," says Home Depot's Johnston. This approach involves finding strategies to avoid disposal of returns.

    Manufacturers and retailers are increasingly collaborating to establish the most effective reverse logistics processes. This collaboration includes addressing issues such as the handoff location, what and where value-added processes should occur, what liabilities exist and how to address them, and ensuring sustainability and compliance.

    Retailers are also looking at their logistics networks holistically, considering forward and reverse operations together. "Connecting the two provides more optimal inventory reuse and rapid redeployment," says Parris. "The better the link, the less time spent trying to fit recovered assets into forward processes."

  • Prevention. Some retailers are pushing even farther upstream, seeking to impact return rates during the design process. Soft Surroundings and Canadian Tire, for example, offer a high volume of private label merchandise, and analyze returns data to discover root causes that can be engineered out of the product (see sidebar). Other retailers collaborate with manufacturers toward this objective.

    "Soft Surroundings does returns analysis on every product that comes back in," says Barrett. "We've invested in managing quality and fit, and enhancing our fabrics to create a better product. That has helped to reduce return rates."

    But driving returns prevention back to product design is still not as common as it should be, and represents an opportunity for improvement. In consumer electronics, for example, about 65 percent of goods are returned with no fault found; often consumers didn't understand the product. Greve sees opportunity for manufacturers to offer technical support call centers to help prevent returns.

  • Network reoptimization. New suppliers come on board. Regulations change. Transportation costs rise. New stores open. These are all reasons why retailers need to continually revisit reverse logistics network design to ensure they are minimizing costs and maximizing recovery rates.

    "Most logistics network costs are predicated on about a $2-per-gallon diesel fuel cost," says Greve. So when fuel prices rose in 2007, it didn't pay to move some low-priced goods back to a centralized DC.

    "Today, however, regulations deter companies from just throwing product away," he adds. "That will drive more regionalized, smaller facilities as transportation prices rise." Instead of operating, say, three returns centers across the United States, companies will run 10 or 15, handling items such as old point-of-sale systems and fixtures in addition to retail returns, Greve predicts.

Driven by Data

At the heart of many of these reverse logistics initiatives is better use of data.

"Logistics service providers have the opportunity to offer business intelligence tools and value-added services to investigate and look for patterns—information a retailer can marry up with data to see, for example, if a product launch had a higher-than-expected return level," says Vehec.

It starts with procurement—or better yet, design. Collecting details on each material used in a product enables the reverse logistics function to predetermine how it should be handled upon return, speeding the process and increasing the potential revenue.

"When we procure product, we work with our vendors to set up proper returns channels," says Target's Dockter.

Pertinent data goes beyond information about the item returned. By combining that information with audits of supply chain, point-of-sale, and other data, retailers can pinpoint the root causes of unsaleables—such as issues with customer sentiment, forecasting, replenishment forecasting, product damage, and shelf rotation—then work with manufacturers to address the problems.

"Increasingly, our retail partners are working with us to resolve these issues," says Dollase. "We used to be more focused on the transactional side of returns logistics management, but we have shifted attention to what we can do to keep that product from being returned in the first place. That's the big opportunity."

Access to data at the point of return also provides a frontline barrier against fraud. Retail associates use receipt data to verify purchase, but can also look up serial numbers and check against third-party databases of consumers with high return rates.

Additional methods to authenticate returned products and guard against counterfeit—now a $1-trillion industry worldwide—include embedding holographic images or uniquely engineered molecules into products or packaging, which can be later detected by their presence and concentration.

Visibility into the movement of returns helps retailers adjust operations according to need. Customer relationships are paramount at Soft Surroundings; the CEO often directly responds to customer comments. So if the reverse logistics staff can see a return en route, they can expedite a refund or replacement, and delight the customer.

Analyzing what gets returned and why helps retailers identify patterns that can shape product design and selection. Retailers are also able to get a better overview of reverse operations.

"At Target, analysis enables us to make intelligent decisions," says Dockter. "We use analysis for modeling, and to determine where we should spend our time and effort looking at the supply chain."

That type of information is available more immediately than it was in the past, so Target can plan productivity around returns demand, and make network adjustments quickly.

The Reverse Logistics Era?

As customer expectations grow higher and competition fiercer, retailers are seeking to simultaneously cut costs and enhance the customer experience. Over the past decade, many have embraced forward logistics as a tool for achieving both goals.

Now they're turning their attention to similar opportunities in reverse logistics, both to address customer centricity, omni-channel operations, and regulation, and to extract more value from their returned goods.

That increased focus is working. By collaborating, retailers and manufacturers have cut return rates by 50 percent and more, according to Inmar's Dollase. Analysis by one drug store chain retailer, for example, reveals that 24-count case packs of goods are too large for individual stores, driving a high rate of unsaleables. By reducing the case pack to six, they cut the unsaleables rate by more than 70 percent.

Such results are emboldening other retailers to step up their own reverse logistics activities.