Supply chain managers oversee the processes by which products make it from the producer to the final customer. In retail, they often deal with how to get products to customers who purchase them through online platforms. They must also contend with the impact of retail reverse logistics.
There are many tools available to supply chain managers allowing them to optimize the path by which the product makes it to the customer. Logistics platforms, warehouse management systems, and other technologies continue to improve supply chain management.
Say, for example, a customer orders a pair of shoes from Amazon. Someone must find those shoes in a warehouse or at a manufacturing site and route them through the proper channels into a package destined for the customer’s address. However, there’s much more to supply chain logistics than just putting items in boxes and shipping them.
It is important to maintain product stock often at multiple strategically placed warehouse locations and to ship orders from the most convenient location. Tools that allow for warehouse management, tracking, and more are what make this possible.
With annual e-retail sales surpassing $3.53 trillion and current projections of e-commerce making up 22 percent of the global retail sales market by 2023, streamlining the associated logistics is vital. Keeping customers happy requires managers to appropriately package and promptly ship orders. Those packages must also arrive quickly. And because online shopping poses certain challenges that in-person shopping does not (the ability to try on clothes, for example), supply chain managers must also consider the logistics of customer returns.
Reverse logistics are a major consideration for supply chain managers. This article will tell you everything you need to know about the impact of retail reverse logistics. It includes a clear description of reverse logistics (also called reverse supply chain), the pros and cons of reverse retail logistics, and the importance of reverse logistics to retail.
Reverse logistics in retail
The world of retail logistics has many moving parts. There must be a platform through which customers can place orders and a system for tracking orders and shipment. There also has to be a way to get the product to warehouse locations, track how much product is in each warehouse location, and choose which warehouse to ship from. Finally, there must be a method to process and ship the order.
Additional aspects associated with retail supply chain management include acquiring and making strategic use of data. For example, having a way to track changes in demand in response to the season, events, holidays, or even special sale offerings can inform retail sales strategies and production needs moving forward.
There is a lot of work involved in making the process of receiving orders from online shopping as seamless on the customer’s end as possible. An additional challenge arises when a customer needs to return an item.
Reverse retail logistics defined
While online shopping is extremely convenient and popular, customers simply can’t look at an item in as much detail as they can in a physical store setting. They can’t always tell from pictures and reviews alone whether something is the right color or size or will do what they intend.
Because of this, online shoppers often need to return items more frequently than those who visit a physical store. In fact, Invesp recently compiled data that suggests that consumers return at least 30 percent of all products ordered online, compared to 9 percent in brick-and-mortar stores.
This is where reverse retail logistics comes into play. Reverse logistics deals with managing product returns. To handle packages coming back into the warehouse, supply chain managers need to make the return process relatively painless for the customer while also watching their own bottom line.
When the products come back to the warehouse, they also need a process in place for putting them back into inventory or, if defective, dealing with their disposal.
Reverse retail logistics impacts
Customers return products for many reasons, including product damage, receiving the wrong item, and the product not meeting their expectations. And with nearly half of all online retailers offering free returns, those companies need to find a way to minimize the expense while maximizing the process’s efficiency.
The amount of annual returns is already in the billions of dollars’ worth of inventory and may surpass a trillion dollars per year in the near future. These numbers are the cost of the inventory and not the cost to the retailer. That cost would include the shipping and processing of the items along with losses due to products being unsaleable after return.
Moreover, return fraud is a problem that leads to additional loss. A recent study indicates that fraud accounts for as much as 8.8 percent of returns. This suggests that retailers would benefit by making efforts to reduce or eliminate fraud attempts as well.
However, retailers must weigh the cost of handling returns against the increase in sales that might result from a more lenient return policy. As it turns out, a company’s return policy can have a rather significant effect on customers’ decisions to buy from that company and the likelihood that they’ll return.
Reverse logistics impacts for customers
How a company handles returns has many effects on customers’ interactions with that company. According to the same Invesp report described earlier, 92 percent of consumers say they’ll buy something again if returns are easy, and 79 percent want free return shipping. Customers want the return policy to be as easy as possible.
Not only do the customers like returns to be easy, but they are more likely to shop at whichever retailer offers the best return policy. Additionally, 27 percent of shoppers said they would purchase an item online that costs more than $1,000 if free returns were available, whereas only 10 percent would otherwise.
Easy return policies don’t just include offering free or discounted return shipping. They may also contain a “no questions asked” clause, allowing customers to return an item for any reason without debate and without needing to prove damage or otherwise give a reason. Easy-to-print labels also help, as does packaging that customers can reuse easily for return shipping.
Making a return policy as easy as possible for the customer often means that each return costs the retailer more. Add to that the fact that the more straightforward returns are, the more likely customers will make use of the return policy. For example, it’s not uncommon for customers to purchase an item in a few different sizes so they can try it on to see what fits and simply return what doesn’t.
To increase customer satisfaction, encourage repeated business, and remain competitive, retailers must often implement generous return policies. To do so effectively without taking a financial hit, they must look for ways to reduce expenses by increasing logistic efficiency and management.
Pros and cons of retail reverse logistics
As described previously, customers are much more likely to return items purchased online. All online retailers need a method for handling products that a customer receives but then doesn’t want, for whatever reason.
While one option is to simply refund unhappy customers and leave it at that, it’s often a better idea to have a return policy in place. By not offering returns and only giving refunds for damaged items, the companies run the risk of losing customers and, therefore, profits. They may also lose out on recovered costs from the returned item.
That said, there are many challenges associated with reverse logistics and supply chain operations that retailers must overcome to make a customer-friendly return policy viable for the company. The following sections outline both the benefits and drawbacks of reverse retail logistics.
Benefits of retail reverse logistics
Most online retailers have a return policy because the benefits of a customer-friendly return policy often outweigh the downsides. Among the benefits are the following:
- Allows for resale: When customers return an item in good condition, the retailer can resell it. The resale profit on higher-cost, more durable items often outweighs the sunken cost of shipping and handling associated with the return. Even slightly damaged items may be refurbished to regain value.
- Increases product life cycle: By passing along a product to another customer instead of letting it lie unused or get thrown out, the overall average life cycle of all identical products increases. It takes time, money, and resources to produce any product. That initial investment sees the greatest return the longer the product life cycle is. Moreover, increasing product life cycles decreases environmental impact.
- Improves sustainability and corporate image: A solid reverse logistics plan can help meet sustainability goals, improving a company’s social profile. A company may resell or recycle a returned item instead of letting it end up in the landfill. That company can then use this reduction to environmental impact as a selling point to attract customers and improve its image.
- Improves customer satisfaction: As described in the previous section, customers are happier when the returns process is smooth. It reduces their worry when purchasing because they know if they don’t like the item when it arrives, they can easily send it back.
- Draws new and repeat customers: When customers shop online for an item, one of the factors they weigh when deciding where to buy it from is the return policy. Customers are more likely to buy from retailers with easy return policies.
Drawbacks of retail reverse logistics
Many aspects of reverse logistics present challenges, however. Often, while getting a package out to the customer is streamlined and easy, handling packages headed in the other direction presents a host of complications that retailers must handle. Some of these difficulties include the following:
- Can be costly: How much value a retailer can recover from a returned item depends greatly on the type of item, its price, and its condition. By accepting returns of inexpensive or easily broken items, the costs of the shipping, handling, sorting, disposal, and refunding may quickly outweigh any benefits.
- Requires labor resources: Someone must handle the return— open the package when it arrives, inspect the item, and determine if it should be resold, recycled, or discarded. If a company doesn’t bring in additional workers to handle this, it can increase all products’ shipping and processing time.
- Leads to return fraud: Some customers take advantage of generous return policies and use them to commit fraud, costing companies money. Fraud might come in the form of purchasing an item with the intent to return it after use, returning a less-expensive item, or removing valuable parts before returning the item.
- Creates forecasting and planning challenges: If a company doesn’t know how many items customers might return, it may struggle to project how much stock to keep on hand. More returns than expected can lead to too much inventory, but fewer can result in running out of stock.
- Leads to lack of control: When companies package and ship products to customers, they have complete control over this process. They determine how to package items, how to ship them, and when. They also can track inventory and make precise plans for when to add inventory. However, returned items may arrive at any time by any means and in any type of packaging. Whereas machines may handle outgoing packages, incoming packages require manual handling.
- Out-of-season returns: When customers return seasonal items (like Christmas ornaments) after that season, it often isn’t prudent to hold them in stock for resale since they aren’t likely to sell anytime soon. So the retailer must decide whether to store and resale them next year or simply dispose of them. This is why many stores restrict returns of holiday items.
Weighing the pros and cons
Retailers must weigh the benefits and drawbacks when devising both a return policy and a reverse logistics strategy. For example, it might make more sense to simply refund customers for low-value items instead of incurring the return costs. This does mean a loss but often a smaller loss than what would result by handling the return.
However, with more expensive items, retailers can regain much of the cost by arranging for a way to send them back. A solid return logistics strategy can make returns easy for both customer and retailer, maximizing the benefits while minimizing the drawbacks. Retailers may also choose to contract with a logistics provider for a more easily managed solution. Logistics providers offer expertise and services such as shipment, order, and vendor management that do all the heavy lifting for you.
Importance of reverse logistics to the retail industry
The percentage of retail sales occurring online was 11 percent in 2019, and industry experts only expect this number to grow. With total online retail sales in the hundreds of billions of dollars annually already, it is clear how vital it is for retailers to pay attention to this market segment.
Reasons why businesses are interested in reverse logistics
Retailers can use reverse logistics to recover at least some of the cost of items for which they refunded the customer. Suppose an item sells for $50, including shipping. By refunding an unsatisfied customer, the retailer is now out that amount. If the retailer has a method for accepting the return of the item, they might lose out on $10 to $20 in shipping and handling expenses but still retain the difference.
Not only can reverse logistics allow retailers to partially recover the cost of refunded items, but it will also reduce the risk for online customers. With no return policy in place, retailers cannot justify offering a refund for any reason other than a product defect or an incorrect item. This means that customers will be stuck with whatever they purchase, even if it ends up not being the right size or not being quite what they wanted after all.
Retailers lose their competitive edge by not having reverse logistics set up and a customer-friendly return policy in place. Customers will choose to shop elsewhere where their risk is less, and the return policies are more forgiving.
Breaking down the steps of reverse logistics
The steps involved in the reverse logistics process look like forward logistics run backward until the last step. While software and robotic machines often prepare items for shipping from a warehouse to a customer, receiving those items back into the warehouse is much messier.
The following are the basic steps of the reverse logistics process:
- Provide the customer with return information: Make it clear to the customer how they should package the return and provide a printable shipping label or arrange drop-off at a shipping service.
- Transport to warehouse: Once the shipping partner receives the item, they transport it to the warehouse or destination prepared to handle it.
- Receive item: The item arrives at the warehouse, and delivery is complete.
- Inspect item: Now, someone must unpackage and inspect the item to assess its condition and determine how it will be sorted or processed.
- Sort and route: The item then moves along to its final destination based on its condition and status. It may move back into inventory for resale or be recycled, upcycled, used for parts, or disposed of.
Implementing a green reverse logistics strategy
Instead of letting unwanted products end up in the dump, reverse logistics makes them available for reselling or recycling. However, repackaging the item makes use of paper and plastic products, and shipping it back requires a vehicle and fuel.
Companies can design their packaging to be eco-friendly, recyclable, and, most important, reusable. Ship items in a box that is easy to reseal and return or in a plastic shipping bag with additional tape for resealing. Decreasing the distance between the customer and the warehouse by shipping to the nearest warehouse can reduce carbon emissions from transportation.
Best practices for retail reverse logistics management
Devising a streamlined returns process requires implementing a streamlined reverse logistics plan. The following are some of the best practices that supply chain managers can apply to achieve success.
Include smart return labels
It is easy to print and include smart return labels in the initial packaging. That way, if a customer needs to return an item, they don’t need to have a printer or take it to the post office. They can simply repackage it and affix the preexisting label.
Again, the easier the return process is for customers, the more likely they are to shop at a particular retailer. Smart return labels not only make things easy for the customer, but these labels can include easily scannable bar codes. Scannable codes allow machines to read the package label. They can then direct it to the proper return handler, eliminating the need for someone to receive an unknown box, open it, and then decide where it should go.
Automate processes when possible
Because return handling can be labor-intensive, the more parts of the process a retailer can automate, the better. Many modern warehouses have machinery that can sort packages and send them via conveyor to different locations. Machines sort incoming returns by product type or another measure before anyone opens or assesses them.
Automation can also occur on the customer end by creating a way for customers to request returns online. The system then processes them automatically with associated product codes. By the time the returned package reaches a warehouse employee, they already have the data about the product and why the customer returned it, and they need to do no more than open and inspect to verify that it’s where it should be.
Establish a single return center
To streamline the process of shipping and handling, many retailers keep inventory in multiple warehouses strategically located for easy and quick shipping to local customers. Sending returns back to their warehouse of origin would require that every single warehouse have a process for handling returns. Instead, a centralized warehouse enables the creation of a single, robust return-handling system.
Since an item’s return trip time is often less important than the time it takes to reach the customer initially, it doesn’t matter if the return warehouse is farther away. Alternatively, multiple centralized return centers can also handle the demand.
Probably the easiest way to handle return logistics is to outsource it to a third-party logistics (3PL) provider. In doing so, you not only relieve yourself or your company of the burden of handling logistics, reverse logistics, warehousing, and more, but you get to rely on experts to do it for you. These 3PL providers often have industry-leading experience, making them better equipped at handling and optimizing your reverse logistics processes.
Contract logistics: Get started with Agility
Online retailers and e-commerce companies have much to gain from a comprehensive reverse logistics strategy. It can save money, improve customer relations, and even have a positive impact on the environment.
If you’re ready to implement a reverse logistics solution but don’t know where to begin, consider 3PL services from Agility. As one of the world’s top freight forwarding and contract logistics providers, Agility is a leader in inventory technology to enhance supply chain efficiency. Offering scalable warehousing and distribution capabilities in some of the world’s fastest-growing markets, Agility 3PL solutions include specialized handling expertise, product integrity, and strategic locations.
Agility’s full range of value-added services includes labeling, packaging, consolidation, order management, quality control, sustainability optimization, and of course, reverse logistics. Get started today by contacting our contract logistics team to learn more.