In 1911, Leon Leonwood Bean started selling waterproof boots to hunters in Maine with a money-back guarantee. Despite a 90 percent return rate on his first run, he continued developing his product and expanding his business. L.L. Bean, now one of the largest retailers of outdoor and sports gear in the United States, has been known ever since for its commitment to customer service.
Driven by practices of brands like L.L. Bean and Nordstrom, most retailers now accept product returns from customers. The rules and requirements around return eligibility may vary, but customers now expect return privileges. Those brands that don’t allow them typically suffer. And as e-commerce growth continues, this expectation is increasing even further.
This trend has created complexity for retailers, who must now focus not just on selling product but also on handling product returns, which can range from 5 percent to 25 percent of units sold depending on the retailer.
Many retailers have long-established methods for dealing with customer returns. These processes vary by product condition and type, but typically involve either restocking, refurbishing, liquidating, or sending inventory back to manufacturers. Yet retailers are under increasing pressure, driven by rising customer expectations, increased competition, and higher costs of doing business. Motivated by these forces, many retailers are taking a closer look at reverse logistics practices as a way to achieve better financial performance.
Across the retail industry, here’s what we are seeing retailers do to get the most value from their returned inventory:
1. Take advantage of direct-to-consumer selling
Most retailers already liquidate open-box and used customer returns in some way. But that method is typically to sell inventory by the truckload in bulk lots. While these sales only recover a small fraction of the retailer’s product cost, they are easy and fast.
What leading retailers are learning is that technology has enabled the efficient resale of returns directly to consumers at the individual unit level. Automated dispositioning and merchandising software has helped retailers reduce the processing cost associated with D2C reselling. This technology has also connected retailers to third-party marketplaces that specialize in open-box inventory, have large audiences, help retailers protect their brands, and move inventory quickly. And because consumers will pay more than bulk purchasers, retailers can recover more of their inventory cost through this new channel.
2. Use vendor return allowances in the right ways
“Return to vendor” rights are not a new concept in reverse logistics (or even purchasing departments, for that matter). But when allowances require retailers to send product back to the manufacturer or vendor, most retailers operate in a “first in, first out” approach. That is, they send inventory back to the vendor as it comes in. This becomes problematic when returns exceed the vendor allotment. Was the right inventory sent back, or should some of that have been sold to consumers so that lower-quality inventory could be sent back?
Retailers looking to optimize the value of their consumer returns are turning toward technology solutions that help them determine which items to send back to vendors and which returns to preserve for D2C remarketing. When retailers do this without sacrificing velocity, they realize a higher overall portfolio recovery rate.
3. Improve efficiencies at the Returns Center
Part of the complexity in reverse logistics stems from the unpredictable type and volume of consumer returns. When all types of product come back in all types of boxes and conditions, it can be hard to implement standard warehouse processes that optimize productivity. Yet some retailers who operate their own returns centers are solving this problem by investing in training specifically geared toward the complexity of reverse logistics. This can include creating custom standard operating procedures (SOPs) for receiving diverse items, and can also include documented processes for testing, grading, and refurbishing of received inventory. When retailers go beyond SOPs and use software to help make those dispositioning decisions, they realize even larger gains.
4. Learn from previous success and failure
One tactic every retail supply chain veteran understands is the need for continuous improvement. Yet when it comes to returned inventory, retailers often lack the fundamental data they need to plan and evaluate improvement efforts. Retailers taking a second look at their returns processes are investing in better instrumentation and data capture. By understanding the return reason code, condition, disposition path, and ultimate performance of each unit, retailers can identify trends to help improve in the future.
As retailers look to reduce expenses and improve revenues, laggards will overlook the importance of adjusting decades-old reverse logistics policies. But leading retailers are demonstrating that paying attention to consumer returns increases the firm’s financial performance, improves the customer experience, and equips the retailer for future success.