On average, retailers received back 16.6% approximately $761 billion of total merchandise purchased in 2021, up from 10.6% in 2020, according to The National Retail Federation[1]. There is no sign that the increasing volume of returns will level off. Moreover, returns double during the all-important holiday season. According to UPS, between 27% to 33% of adult Americans make a return before the end of January[2].
Most companies have unprofitable, costly reverse logistics networks that cycle returns slowly and fail to help alleviate any of the strain. Managing returns is so problematic that many companies have told their consumer base to simply keep products rather than return them. Moreover, the cost of managing returns is draining working capital and squeezing retailers’ already stressed margins, especially at a time when many retailers are offering deep discounts to consumers to move piled-up inventory[3]. Companies of every stripe need to reverse their thinking on this approach. It is not sustainable, and there is ample room for consumers to take advantage of the system by overbuying and returning excess products.
Reverse logistics can, and should, add value to a company’s supply chain. To fix their reverse logistics processes, manufacturers, consumer goods companies, and retailers need to:
- Prioritize gathering data throughout the collection, inspection, reprocessing, and redistribution channels to map flows for both useable and end-of-life returns: Most retailers do have baseline visibility into the volume and quality of returns or even why a customer has initiated a return. However, without granular visibility into returns channels, retailers and sellers cannot pinpoint inefficiencies at various network stages and uncover where they must direct resources to streamline processes. Retailers who do prioritize data collection discover wasteful steps in their overall reverse network design. With that information, sellers reevaluate the appropriate channels for returns, remove waste, and even reshape the overall network design, redefining how they should construct facility layouts and adjust transportation modes for their specific products.
2. Integrate artificial intelligence into the returns network to digitalize processes and improve decision-making: Collecting data and improving network visibility allow retailers to focus on how artificial intelligence and machine learning can help remove costly errors in returns routing. Empirical evidence shows that most costly errors stem from resources guiding customer returns through inefficient and unprofitable channels. That is where AI can proactively address these challenges. For example, many CPG firms will use AI to determine what channel will produce the most value for an incoming return, whether recycling, refurbishing, reuse or even disposal. AI will synthesize data sets, including the demand for a product, the return’s condition, the amount of inventory on hand, and external market dynamics, to direct returns down the appropriate channel to generate maximum value.
3. Outsource the reverse logistics network to a third party if it continues to inflict strain on the retailer: Mapping processes and leveraging technology, data, and AI will transform and evolve a retailer’s reverse network, but only if the company has an appetite to manage reverse logistics processes in-house. Some companies wish to focus solely on core competencies and strategic endeavors. Outsourcing reverse logistics to a third-party provider will alleviate some financial and operational burdens, allowing those companies to direct capital and resources to their area of choosing. Moreover, these third-party organizations make investments in sustainability and ensure that components and scraps are repurposed and disposed of in the most environmentally friendly way.
Reverse logistics is increasingly essential. But, if not well managed, it is a significant drag on retailers’ razor-thin margins. It has also been mainly ignored, especially during the last few years, as companies focused on getting the product to market against worldwide shortages, high demand, and supply chain disruptions. However, we are now in an era that threatens stagflation, where no retailer and seller can ignore the cost of handling the growing volume of returns. It certainly cannot be so costly and inefficient that it warrants telling a customer to keep their product rather than return it. Retailers who effectively prioritize reverse logistics to generate value for the consumer and their own bottom line will have a competitive advantage in the future.
