September 2014 | Commentary | Reverse Logistics

Product Returns: 5 Myths Busted

Tags: Reverse Logistics, Retail, Supply Chain Management

Retailers and manufacturers often avoid dealing with product returns until returned inventory clogs up the warehouse or write-offs hit their P&L. When the returns problem gets big enough to force action, they attempt to deal with it as quickly and cheaply as possible.

Executives often avoid returns issues because they believe in one or more of these five reverse logistics myths:

1. Returns are junk. This is the biggest, most pervasive returns myth. Returns are not junk. In fact, only about 20 percent of returns are actually defective, according to many studies. The number-one reason consumers return purchases is buyer's remorse. Most returns are functional and often valued at 75 to 95 percent of original value. Even defective products have value if processed properly.

2. When processing product returns, take your time. Returns are more like bananas than wine – they don't get any better with age. On average, returns lose 10 percent of their value every 30 days, so process returned goods as fast as possible. Best-in-class returns operations turn their inventory between 24 and 50 times annually.

Processing delays can cause issues with internal shrinkage, claims reconciliation, product damage, and reduced value of returned products on the secondary market.

3. You do not need dedicated reverse logistics leadership. Many companies assign returns to a mid-level manager. Returns management requires executives to work with buyers, operations, sales, accounts payable, and systems. Asking someone to add this to their existing responsibilities ensures that returns will get the short end of the stick. Product returns can comprise as much as 20 percent of total inventory, making it worthwhile to dedicate resources to returns.

4. Managing returns is much easier than running a distribution center. This myth could not be more busted. Most DCs set clear standards for receiving, picking, and shipping, and most companies have a warehouse management system (WMS) that drives the process. The manager's job is to staff operations properly, and keep workers trained and happy.

Processing returned inventory is more complicated. Nobody orders returns. You don't know what you will receive until it arrives. Each item has to be inspected. The OEM usually has to provide a returns authorization request before shipping, and often the product is not in its original carton or packaging, which complicates the process.

5. You don't need special returns software. Many companies don't want to invest in a returns management application, and use an existing WMS to process returns instead. With so many differences, most warehouses end up doing a bulk receiving in the WMS, and stacking returned goods in a corner. Once the product is in the warehouse, it has to be manually inspected and prepared for shipping. Companies are often shocked to learn how much money they actually end up losing by attempting to save money with a WMS not built to handle returns.

Product Returns And the Bottom Line

The average retailer's return rate is 8.12 percent of sales, according to the National Retail Federation, and the average manufacturer spends between nine and 14 percent of sales on returned product, according to the Aberdeen Group. Managing returns can have a big impact on a company's bottom line. The first step toward improving this bottom line contribution is to stop believing the five myths of reverse logistics.