According to a recent National Retail Federation survey, retailers estimate that total annual returns will reach $260.5bn, or 8 percent of total retail sales in 2015. With a big chunk of that activity taking place in the weeks following the holidays. As online sales make up an increasing percentage of consumer purchases, this number is only going to go up. Because online shoppers can’t physically see or feel the items they purchase, up to one third of items bought online are returned, according to the retail consultancy Kurt Salmon.
For a long time, returns have been regarded in the retail industry as a necessary evil and an unfortunate drain on the bottom line. Looking at returns this way is an outdated approach, but unfortunately, many companies and their leadership teams – operating in a business as usual mindset – have failed to recognize the huge opportunity that comes when you go beyond simply “returns” and instead implement actively managed reverse logistics operations – the process associated with managing a product or material after the point of sale to maximize its value – in order to streamline the post-sales product lifecycle and improve the bottom line.
For many organizations, the extent of their reverse logistics strategy amounted to the purchase of extra warehouse space in which to store items that are broken, damaged or returned, with no final goal in mind. This approach simply adds to company expenses – items sitting around incur costs rather than generate revenue – and essentially takes this merchandise out of circulation with no possibility to recoup any associated losses. Creating an “island of misfit products” is a stopgap, not a solution.
The “out of sight, out of mind” approach may be tempting, but it’s not a tenable business strategy. So what’s the alternative? Reverse logistics, which crosses multiple departmental boundaries and requires support from many departments to work effectively, is an organization-wide commitment to a set of guidelines specifically created to help brands and retailers transform costly, outdated returns management strategies into active revenue drivers.
When customers return non-functioning devices, most retailers store them in a backroom or warehouse, and view them simply as a waste and a burden. Instead, these should be viewed as a potential free source of spare parts which can be used in the production of newer or refurbished products. To make reverse logistics successful, it is critical that companies feed products back into production, enabling them to enjoy cost advantages over others that they produce from scratch. Brands and retailers need to get out of the mindset that a returned product is a failure and a dead end, and embrace a more innovative, comprehensive and long-term approach to extracting value from goods in the after-sales portion of the product lifecycle.
Beyond getting products and parts back onto shelves and into customers’ hands, reverse logistics can also provide companies with valuable insights that can benefit future versions of products. For example, every person with a smartphone has experienced screen breakage due to accidental drops; the phone works properly in theory, but is no longer appealing or usable. After reporting the damage to your phone carrier, you send back the damaged phone and receive a refurbished phone in exchange. Refurbished products normally come with a negative connotation as being “someone else’s damaged product,” but it’s actually the same fully-functioning device with some newer replacement parts. Depending on how many phones the carrier gets back for the same reason – in this case the breakage – and by capturing the relevant information as to the causes, retailers can use this information to note a trend and make a decision to change the design. The carrier can then use this insight to replace the fragile glass with a more durable solution, resell the phone and still make a profit, proving that even “broken” phones can offer an organization added value.
An effective and profitable reverse logistics strategy goes beyond the products traditionally seen in the returns game. In reality, the reverse logistics pipeline is much more diverse than simply defective or unwanted items. Returns and defective products make up only about 25 percent of the total value of all assets processed in reverse logistics operations, while the other 75 percent are processes not typically associated with reverse logistics, such as recalled products, overstock, fixtures, recyclables, capital assets, end-of-life goods and other assets to be disposed of. All of these elements represent an opportunity for brands and retailers to transform sunken costs into new profits.
If you ask 10 brand and retail executives to categorize reverse logistics, the smart money says that nine of them will say it’s a challenge – and maybe even a nightmare. There are so many moving parts in reverse logistics operations spanning all areas of business that no one person can possibly manage it all effectively. That’s why it’s often relegated to an afterthought status, where it inevitably falls off the radar. However, that one executive who can identify reverse logistics as an opportunity is the one that will put his or her organization in a position to substantially improve its bottom line.
Brands and retailers need to stop thinking about reverse logistics as “just returns” and start to instead recognize – and act on – the potential benefits that come from properly managing their reverse operations. From the top down, executives must start supporting and prioritizing reverse logistics operations; supplying employees and executives with the resources they need to manage operations efficiently and consider the feedback from their customers in order to save money, reduce excess inventory and improve customer satisfaction.