January 2014 | Commentary | Reverse Logistics

Minimizing the Financial Impact of Peak Season Returns

Tags: Reverse Logistics, Inventory Management, Retail, Supply Chain Management, E-commerce

As the supply chain world settles in for a long winter's nap, the reverse logistics world is shifting into overdrive to handle peak returns season. Both retailers and manufacturers report that the percent of returns for 2014 is roughly the same as it was by this point in 2013.

The rate of returns for holiday season purchases will likely equal approximately 8.1 percent of total retail sales. Two different streams of products flow through the reverse logistics pipeline in the first quarter, however. One stream is customer returns; the other is recalled or overstock product that did not sell, and must be cleared from the primary sales channel.

Early figures suggest the volume of recalled or overstock product for 2014 will be up slightly over 2013. Categories that experience deep discounting before the end of the holidays typically experience higher recall rates.

Online Shoppers Boost Returns

A major challenge facing many retailers is how to deal with the growing number of Internet purchase returns. Many retailers see return rates rise dramatically as the percentage of Internet sales grows.

For many categories, the return rate for goods bought online can be three times higher than the same goods sold in brick-and-mortar stores. While this may seem excessively high, the reality is that—unlike in-store purchases—the majority of returned online purchases can be returned to stock.

The challenge is how to leverage reverse logistics capabilities when Internet order fulfillment centers are not located close to existing reverse logistics facilities.

Taking a Smaller Hit

For many retailers and manufacturers, 40 to 60 percent of total returned volume is received and processed in the first quarter of the year. The goal of an effective reverse logistics process is to minimize the impact of processing these returns.

The first thing companies must do is provide the space and labor needed to keep up with the high inbound flow of goods. Timely processing of both defective returns and overstocks is key to maximizing the recovery rate on this inventory. Companies must provide additional space for processing and shipping the higher volume.

This may mean using excess space in a nearby warehouse, renting storage trailers, or taking a short-term lease on a separate facility. A common mistake is to focus on the extra expense, and not consider losses on recovery value.

Streamlining Processes

The second step to minimize the impact of peak season returns is to manage processing and shipping. Simply taking a first-in/first-out approach can needlessly tie up space and capital. Management must review inbound inventories by manufacturer, and maintain a balance between freeing up space to process, shipping high-value inventory out of the facility, and avoiding excessive aging of the rest of the inventory.

Properly managing the sequence of what is sold on the secondary market and returned to an original equipment manufacturer can also have a significant impact on both recovery rates and processing costs.

The first quarter sets the tone for the year. Get your reverse logistics operations off to the right start and set yourself up for a profitable year.