Just like the old saying about free lunches, there is no such thing as the ‘free’ return of goods that we buy online. But with today’s consumers increasingly demanding just that – and businesses recognizing the scale of the problem – how can they manage returns cost-effectively?
In the UK alone, businesses spend an estimated £20 billion each year handling and managing returns. With delivery at around 20% of the sales value of an item, and three times that if returned, many businesses’ biggest supplier is actually their customers. Companies in the fashion sector, for example, can see the return of 50% of the products delivered through e-commerce channels, so the ongoing supply of products and subsequent refunds need careful thought.
Mismanagement of returns and its impact on the environment and society is also increasingly under the spotlight. One undercover media investigation recently revealed that a leading online retailer had earmarked 124,000 unsold and returned items for destruction. The news resulted in a public outcry.
A positive future for e-commerce therefore requires all businesses to understand and define a reverse logistics and returns strategy. The term ‘reverse logistics’ describes the activities conducted after the initial sale of a product to recapture value and potentially end the product’s life cycle. Just as there are increasing consumer and investor concerns over environmental and societal risks, there are also concerns about the impact on shareholder value from increasing reverse logistics costs.
Today, it is increasingly recognized that returns management requires an end-to-end strategy, managed cross-functionally within the organization, including finance, transport, warehousing and manufacturing. The strategy needs to start at the design stage, as many reverse logistics costs are locked in at this point of the life cycle.
While the ultimate goal is to avoid returns, returns avoidance strategies are dependent on the type of product being supplied. Most importantly, the business needs to ask what it can do to help its customers buy the right product and use it as intended. In home goods and electronics, avoiding returns will require procurement teams to understand the life cycle costs of procuring particular components, since if quality is poor, and returns or recalls increase as a result, future costs and margins will be impacted.
Information systems need to capture the reasons for returns, highlighting design issues that can be improved. We are seeing an increasing focus on ‘eco design’ with products designed to be easily serviceable, enabling the recapture of value when a product is returned or is at the end of it's life.
Returns management needs to ensure that the logistics networks and processes minimize cost but also maximize asset recovery. This requires the exploration of reducing and repairing returns, but also of revitalizing them. For instance, it’s becoming more common to see certified refurbished products promoted by brands, which give the items a second life and thus reduce margin erosion. Finally, returns management has to consider the final disposal of the product, minimizing what goes to landfill and extending the life of the often precious resources that have been used.
Effective returns management must ensure that circular economy principles are in place, ensuring that ESG risks are fully considered. Ultimately, e-commerce returns can only be addressed effectively by ensuring collaboration within organisations and within the supply chain that the organisation is part of.
That means partnering with the best to ensure robust processes and networks are in place, with information systems that provide data on consumer preferences and – crucially – the reasons why the product was returned in the first place.
My hope is that this report will provoke a valuable discussion within your organization, enabling you to innovate your reverse logistics and returns supply chain.
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Erez Sages
Co-Founder & CEO