Returns Management: A Forgotten Lever for Supply Chain Efficiency
Past Focus and Current Attention
Getting product out the door to a customer is the focus of most supply chains. Tremendous amounts of resources are invested in efficiently planning product needs from supplier to manufacturer to customer. This outbound process focus allows a company to maximize sales and move product efficiently to meet their customers' needs.
However, what happens when product has to come back from the customer because of errors, reduced need, damage, or recall? Is the process to take back returned product as well-planned as the outbound channel? In almost every company, the answers to these questions are not well-defined. Returns processes are often made up of inefficient, manual operations that do just enough to get the product out of the customers' hands. The result is a hodgepodge of back-end operations that are very costly due to the inefficiencies and, more importantly, dissatisfied customers. This is complicated by the fact that returns processes don't work just by throwing the outbound process in reverse. Outbound and returns processes work differently and therefore must be addressed separately.
This inefficient state of operations doesn't have to exist. Some firms are stepping up to improve this reverse supply chain and, in the process, benefiting from very fast and significant returns on investment. The good news is that it doesn't take many resources to diagnose and improve the returns management process. All it takes is focus and discipline.
Setting the Stage
The scenario that comes to mind when most people think of returns is where a consumer returns a shipment to a cataloger or online merchant. Although this obviously does occur frequently, returns in the business-to-business segment are much larger in volume and value and offer significant opportunities for improvement. As a result of the larger stakes in the business-to-business segment, the penalties for poor performance are that much higher. Returns are a much bigger issue than most people might imagine.
- On average, 15 to 20 percent of all goods sold are returned.
- One estimate has returns costing $43 billion per year, which equates to 4.5 percent of all logistics costs for the U.S. economy.1
- In some industries, the return rate is as high as 50 percent.2
- In apparel, the return rate is around 35 percent.
- Another telling statistic is that it is three times more costly to process a returned order than an outbound order.3
These statistics are just a snapshot of the size and scope of the returns market.
Areas of Opportunity
Reduce Physical Processing Costs
Currently, returns are often handled multiple times from the time the customer decides on the return until it is put back in stock or resold. A manually processed returns order can cost a company more than $30, not including transportation and disposition. Sometimes, the returned product even goes to more than one location before its reselling status is determined.
The first of many steps in a typical returns process is to get a returned-merchandise authorization (RMA) number assigned. This requires approval from the supplier or vendor company and initiates the returns process. It typically requires a call to a customer service representative at the vendor (this typically costs about $1 per minute), and in most cases it requires more than one call. Next, transportation has to be arranged for the return, and a mailing or shipping label has to be generated to enable the transportation. Many times, a label is printed out by the vendor and sent by mail or overnight delivery to the customer (this can cost up to $15 for each return). The product is then shipped back to the supplier or possibly a third party who handles that supplier's returned goods processing. Next, the product has to be received into the facility and then the status of the product has to be determined.
Determining this status is referred to as disposition. This might require several steps including opening the box, evaluating the contents, and testing the product. Before a product goes back into the sales channel, it may have to be repaired, repackaged, and reshipped. Obviously, these tasks have to be performed manually prior to the product being re-entered into the inventory system for resale, sent to a discount or salvage house, or thrown away.
Handling and transportation costs can be reduced if the returned product is sent to the proper location the first time. This eliminates duplicate handling and transportation expenses. Typically, returns movements are not planned. This results in returns arriving at processing facilities unannounced. By having unplanned return receipts, the efficiency of the processing facility is negatively impacted by clogging up receiving areas and causing facility labor imbalances. As a result, the returns are often the last items processed, thereby postponing the returns dispositioning process and delaying customer credits. By knowing what is coming back and when, facility managers can better plan labor and speed up returns processing.
Increase Revenue Through Better Asset Recovery
Probably the greatest area of financial opportunity lies in increasing asset recovery dollars. Essentially, this occurs by reducing the amount of reduced-price sell-offs of goods that have been returned. Obviously, some product that is returned cannot be resold as new, including damaged and out-of-date or obsolete items. For items that can be resold, the goal is to get them back in the sales channel at the highest selling price possible and as soon as possible. The longer the delay, the more value of the item is lost due to obsolescence. Consider the personal computer industry, where product lifecycles are in the four- to six-month range. The revenue gained by getting returned product quickly back into the selling cycle to control obsolescence is significant.
On another note, delays in the returns processing cycle translate to forgone revenue due to missing acceptable returns windows. There are time windows provided in the returns policies of supplier firms under which returns have to occur or the return is no longer acceptable. This is parallel to customer returns policies at retail stores, where there is normally a 30-day return window. In business-to-business transactions, the window is often longer — possibly 60 days. Firms lose significant amounts of money, sometimes in the hundreds of millions of dollars, by holding product beyond their suppliers' return windows and thus having to dispose of the product themselves at much lower prices.
The goal in asset recovery is to get returned product available for resale at the highest possible price. This means that the first option is to resell as new; the second option might be to refurbish or repair and resell; the third might be to sell to a discount house; the fourth option might be to sell to a salvage house. Because product is often unnecessarily delayed in the channel, it has to be sold at a fraction of its previous value due to both missing return windows and obsolescence. Streamlining the returns process reduces total time for a return to be handled and reinserted in the selling chain and allows for recovery of dollars. This recovered investment can either increase profitability or be reinvested elsewhere in the company.
Reduce the Number of Returns
This is so simplistic that it is almost ridiculous — reduce the number of returns to save money in the returns process and improve profitability. This can be accomplished by improved product quality, but another way that may not be utilized as fully is to enforce current returns guidelines. Many companies take product back and give credit to customers for returned product that should not be accepted. It is often accepted because there is not a linkage between the people reviewing the return request and those at the returns processing facility. If companies simply enforced the returns policies on the books, the number of returns would be reduced. In addition, an analysis of the returns policies might reveal ways of improving the returns terms to be more fair to both the selling company and its customers.
Figure 1: View of Returns in the Supply Chain
Source: ReturnCentral
Figure 2 Cost of Manual versus Automated Returns
Source: Gartner, Inc.
Reduce Transportation Costs by Getting Beyond Parcel
To date, there has been little focus on the transportation side of the returns equation. The work done in transportation relating to the returns process has focused on parcel shipping. Most of the large parcel shippers have online Web capability to schedule returns pickups and track the package back to the vendor. However, this is typically carrier-centric and does not compare prices across multiple carriers. In addition, they usually neglect a large portion of returned product shipments — less-than-truckload-sized returns shipments and other, larger shipments including international.
There are two ways to reduce returns transportation costs. The first is to compare prices and choose the lowest across multiple carriers for a returns shipment, whether it be parcel or LTL. The second is to coordinate returns shipments to get lower transportation costs with larger shipments (via better vehicle and mileage utilization) through a committed level of returns shipping volume to carriers. By better coordinating returns shipments within a company and across companies to leverage transportation savings, cost per return and overall transportation expenses can be reduced.
Typically, returns are sent back haphazardly via multiple carriers. Due to this, returns transportation expenses can be reduced by convincing customers to use preferred carriers with negotiated rates to ship returned product back. Again, this is a matter of focus and discipline in reducing costs in the returns process.
Increase Customer Satisfaction
The last area of opportunity to address in improving the returns process is the chance to increase customer satisfaction and goodwill. If a potential customer knows that your returns process is an easy one to work with, they might be more likely to try your product and then become a regular customer. This is an important issue for online merchants and the same logic applies to business customers. An easy-to-use returns process that also credits customers' accounts quickly is a way to earn new customers and increase loyalty of existing customers.
Technology Capability and Applicability
What functionality exists in the software realm that can enable more efficient returns processes? There are many capabilities that currently exist in returns management software that can significantly improve returns management operations and planning as well as specifically address some of the issues discussed earlier. Existing packages enable:
- Online RMA generation and automatic disposition determination
- Remote shipping label generation
- Rate engines that allow selection of the lowest shipping cost option across multiple carriers
- Returns tracking
- Online returns policies
- Returns data collection to make better decisions.
Online-generated RMAs reduce the need and therefore the accompanying cost of customer service representatives and can provide immediate disposition of product based on guidelines. Mailing labels generated at the customer (remote) location eliminate mailing expenses and reduce time in the returns process. Rate engines allow cross-carrier rate evaluations and help find the lowest cost transportation options for individual returns across several modes (LTL, TL, and intermodal — both domestic and international). Carrier pickups can also be scheduled online to eliminate another phone call. Returns tracking gives customers peace of mind and increases satisfaction by giving them visibility into the returns process.
Automating returns policies helps move a gray decision to a black-and-white one. Online returns policies and approved SKU-specific returns reasons take the guesswork out of whether a return should be approved or not, thereby reducing unnecessary returns and providing a clear set of guidelines to those dealing directly with customers.
Better and more data on returns can help make better decisions across the company. The ability to use returns information to make improvements across the company helps areas including manufacturing and product development. Returns reasons, if collected and shared, can be used to improve product design or identify improvements in the manufacturing process that reduce defects. Earlier knowledge of product defects can also increase customer satisfaction by reducing the number of customers who receive unacceptable product. Reducing the total recurring amount of returns can also help reduce safety stock and its accompanying carrying costs previously held as security to replace defective product.
Proactive returns planning can help plan and balance company inventory. Many times, inventory planners get their levels just right and then are hit with returns that throw off their carefully laid plans. Collecting historical data on returns for planning purposes will help in this area by using prior experience. Data that might be beneficial includes:
- Reasons for all the returns
- Total number of returns by type of product, by SKU, or by customer
- Returns cycle time: the amount of time from customer initiation to credit given.
Implement Changes and Reap The Benefits of an Effective Returns Program
If a returns program is improved, the time from initiation of the return until a customer receives credit is shortened, and the accompanying cost to handle each return is reduced. This should result in increased customer satisfaction and loyalty by providing a faster refund or credit for a customer's return.
From the standpoint of realizing the benefits of improved returns management, both the physical and informational flows have to be considered. There are two common options used in improving operations. The first is to fix the process and then look at possible software applicability, and the second option is to improve the process and select software at the same time. Once the physical and information processes are streamlined, then a company can look at possible software and technology solutions to identify additional areas of opportunity to reduce costs. What definitely should not be done is to automate current returns management without looking for process improvements first. This only automates existing inefficiencies rather than improving operations.
At first glance, the returns process might seem like it deserves the minimal attention that it currently receives. However, after some initial research and consideration, a large, glaring cost-reduction opportunity will be visible in returns management. It doesn't take much money — it just takes focus and discipline. n
