Product Returns Reverse Logistics as a Competitive Advantage

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1 MULTICHANNEL MERCHANT» OPERATIONS & FULFILLMENT» O+F ADVISOR» PRODUCT RETURNS Product Returns Reverse Logistics as a Competitive Advantage April 2009, By Rob Martinez Most established big box retailers and online merchants have had several years to develop sophisticated Reverse Logistics including asset reclamation and returns processing. However, for the developing and growing online merchant, returns can be a challenge and a work in progress. Through personal observations having reviewed the operations of many online merchants, resources are often stretched just to get product out the door. Frankly, what happens on the backend it often an afterthought. In this article, we will review a basic overview of Reverse Logistics, operational challenges and basic returns management strategies. In the world of ecommerce, product returns are unavoidable. With return rates commonly ranging from 5% (hard goods, gifts) to 25%+ (shoes and apparel), online merchants of all sizes must become adept at Reverse Logistics to: 1. Get and keep more customers 2. Maximize and extend the value of goods sold 3. Minimize the impact of returns on profits In fact, online merchants have the opportunity to turn Reverse Logistics operational challenges into competitive advantages and increased sales. The relationship between return policies and consumer purchasing is well documented through surveys and research from Harris Interactive, ComScore, McKinsey, PWC, KPMG, Jupiter Research, BizRate, AMR Research and others. Consider the following reseach: 95% of customers say they are likely to shop with an online or catalog merchant if the returns process is convenient and 85% say they will stop buying from a retailer if the returns process is a hassle (Harris Interactive)

2 75% of consumers surveyed said a simple return policy was a deciding factor in their shopping behavior (KMPG) 89% of online buyers say return policies influence their decision to shop (BizRate.com), and 40% of shoppers don t buy online due to returns difficulty (Jupiter Research) Customers who have their complaint resolved quickly have a repurchase intention rate of 82% (McKinsey) Customers will spend 5 to 20 times the initial sales price on subsequent services and consumables (AMR Research) While an easy returns policy may be important to consumers, returns management is extremely complex and costly for shippers. The goal for many companies is fewer returns whenever possible. The paradox, of course, is that the easier it is to return an item, the more returns you ll have. Zappos, for example, offers one of the most generous returns policies in the apparel industry. Returns are free with no questions asked. The result? A 35% return rate. However, equally staggering are the consistently high consumer ratings of the online seller of shoes, handbags, accessories and more. Not to mention double to triple digit annual growth. Zappos is able to charge full retail prices for their products. Zappos return policy and commitment to customer service are competitive differentiators. What is Reverse Logistics? The Reverse Logistics Association ( defines Reverse Logistics as all activity associated with a product/service after the point of sale, the ultimate goal to optimize or make more efficient aftermarket activity, thus saving money and environmental resources. The Reverse Logistics Executive Council (RLEC estimates that reverse logistics costs account for almost one percent of the total United States GDP. The importance and impact of Reverse Logistics is most critical in industries with high return rates, warranty operations and/or short life cycle products. These include software, retail, computers, appliances, cell phones, publishing and others. Consider the fact that 300 million cell phones and PDAs go obsolete each year. While forward logistics includes product development, materials management, manufacturing and distribution, reverse logistics refers aftermarket call center support, asset recovery (returns, recalls, seasonal inventory, salvage, restock, obsolescence, etc.), service logistics (repair, refurbishment, warranty management, etc.), recycling and environmental management, and end-oflife manufacturing.

3 Challenges of Reverse Logistics It is widely accepted that Reverse Logistics offer greater challenges than traditional forward logistics. The RLEC summarizes many of the important differences between forward and reverse logistics below: Forward Logistics Forecasting relatively straightforward Distribution is one to many Product quality uniform Destination routing clear Pricing relatively uniform Disposition options clear Importance of speed recognized Forward distribution costs visible Inventory management consistent Product life cycle manageable Reverse Logistics Forecasting more difficult Distribution is many to one Product quality not uniform Destination routing not clear Pricing dependent on many factors Disposition options not clear Speed often not a priority Reverse costs less visible Inventory management not consistent Product lifecycle issues more complex Straightforward negotiation between parties Negotiations complicated by several factors Marketing methods well known Visibility of process more transparent Marketing complicated by several factors Visibility of process less transparent To further demonstrate the greater challenges of reverse versus forward, consider product returns, the most common aspect of Reverse Logistics. Product returns start with the end user making an assessment about a product that can range from assumptions about proper functioning ( It doesn t work ) to a change of heart ( I just don t want it anymore ). The table below summarizes primary reasons for returns given by consumers. Reason Percent Product was not what I expected 40% Product was damaged 31% Quality not as expected 31% Right product, wrong characteristics (color, size, etc.) 27% Wrong product 26% Decided I didn t want it 19% Product delivery was too late 17% Partial order received only 7% (Source: PricewaterhouseCoopers LLP) Because the end-user initiates the shipment process, there s little control over carrier or shipping service, paperwork and/or explanation for the return.

4 Moreover, returns management is labor intensive. Receiving crews are forced to conduct research and make a series of decisions. What goods have been received? Complete or partial order received? In what condition? Restock, repackage, return to supplier or scrap? Does the item returned match the original order? Can we authorize a credit and/or exchange? Finally, the returned item must be documented, barcoded and warehoused. A former employee of the largest specialty retailer of home furnishings, appliances and garden accessories reported that the cost of processing returns were so high, it would have cost less to send the consumer a $100 check to shop elsewhere. As a result of these challenges and costs, many companies are forced to offer a variety of returns policies depending on the product. For example, Amazon.com developed a list of 28 different return policies by product and value (books, electronics, beauty products, etc.) Factors to Consider in Returns Management When developing your return policies, your corporate Reverse Logistics team should balance customer satisfaction as well as corporate profitability. There are several other factors to consider. Why is the product being returned? For example, you may offer free returns for products returned because the wrong product was shipped, but charge a fee for product returns due to change of heart. Take into account the time elapsed between purchase and return, the dollar value ( is it worth returning? ), and the characteristics of the product itself ( what s the cost to return the item? ). Consider the added shipping costs of bulky or heavy items, and for returns from international customers. The customer life cycle is also important. What s the likelihood the customer will order from you in the future? What s the financial impact of a happy customer over the years? Best practices in returns management include the following steps: 1. Develop return instructions that are clear and easy to follow. 2. Include a returns form with a reason for the return, and if the customer wants an exchange or credit. The reason for the return can help the returns team determine how to handle the item (restock, repackage, repair, etc.). The returns form should capture the original purchase information (barcode, purchase order or other identifier) to validate the return and authorize credit. 3. Develop a return label with prepaid postage/shipping, and a method to deduct the freight charge from the customer (if appropriate). FedEx, UPS, DHL and the US Postal Service offer a variety of services, costs and labeling options for handling returns. There are several 3PLs and parcel aggregators that specialize in returns including Newgistics (see resources below). Finally, track returns closely. Understand which products are returned the most and for what reason. Track the percentage of returns by SKU sales. Once you ve identified the products with the highest

5 return rates and the primary reasons for the returns you try different approaches to reduce or eliminate return rates (e.g., modify or close-out the product, change order instructions or packaging techniques, etc.). As the example of Zappos indicates, online merchants have the opportunity to turn Reverse Logistics operational challenges into competitive advantages. Good luck! Resources The Reverse Logistics Association ( The Reverse Logistics Executive Council ( Reverse Logistics Professional Report ( US Postal Service ( UPS ( FedEx ( Newgistics ( Rob Martinez is President of Shipware LLC, a transportation spend management firm specializing in carrier contract negotiations, audit & pay and information management to help shippers reduce costs 10%-30%. He welcomes questions and comments at rob@shipware.com.