Today, the competition in the global business realm is fierce. Every company out there is trying to find the best ways to gain a competitive edge that will bring them to the top and help them stay there. But not many organizations understand that reverse logistics is a process that can help them achieve such success. They underestimate the fundamental effect and potential value that reverse logistics can have on their business.
Customer-friendly return policies and changes in customer expectations have led to a considerable increase in product returns. And everyone, including manufacturers and retailers, is feeling the pain of returns. In the eCommerce world, facilitating easy and quick returns is the cost of running an eCommerce business. Everyone thinks about forward logistics and getting the product delivered to the customer. However, the days of the linear supply chain are gone because the rise in consumer awareness has led to a new challenge for retailers – product returns are the second cycle that comes into the picture once the item is delivered to the consumer.
In our comprehensive guide on reverse logistics, we will discuss all the vital aspects of a well-designed and adequately implemented reverse logistics process, the pain areas that retailers face, and ways to make it more effective.
What is Reverse Logistics?
Reverse logistics (also called reverse flow) is a complex “process of planning, implementing, and controlling the efficient, cost effective flow of raw materials, in-process inventory, finished goods and related information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal.” The process is opposite to traditional (forward) logistics, in which products and materials move from the manufacturer/retailer to the warehouse to the customer. Your warehouse or distribution center should be organized and optimized to handle the reverse logistics process.
A reverse logistics solution involves any management or process after the sale of the product, and is likened to the recovered product management process, which aims to recover the environmental and monetary value of discarded or used products and raw materials. The main objective of this process is the overall reduction in waste level. In other words, the products are moved back to the retailer or manufacturer for disposal in a profitable way – remanufacturing, refurbishing, reconditioning, recycling, or reselling.
Each product that is returned to the warehouse gets examined by the warehouse staff. They examine the product’s condition and (depending on its condition) it is either marked as damaged to be discarded, repaired, or restocked on the shelf for sale. Other examples include the return of unsold merchandise from a wholesale customer and return shipping from retail buyers.
A well-established reverse logistics program is as important as managing other aspects of your supply chain.
Reasons for Reverse Logistics Service in Retail
Brick-and-mortar stores have the luxury of putting a No Returns board because the shoppers can touch, examine, and possibly try a product before buying it. Online retailers cannot afford to do that. There are various reasons that make reverse logistics inevitable, such as delay in order fulfillment, damaged product, customer behavior, and delivery of incorrect products.
Some products or materials are inevitably returned to the retailer, and customers often return the products because:
- The customer no longer needs the product
- The customer canceled the order
- Malfunctioning product
- Customer engages in wardrobing (return fraud)
- Incorrect product or product size ordered
- The retailer sends the wrong product or product size
- The product was damaged upon arrival
- The product didn’t match end customer expectations
What causes the surge in product returns?
The main reason behind the surge in product returns is the rise of eCommerce over the past ten years. It is reported that the rise of eCommerce has driven a significant increase in the returns rate of retail sales, and the factors that contribute to eCommerce return statistics include consumer behaviors, digital challenges, and emerging business models unique to eCommerce. The main causes of the increasing volume of returns include “wardrobing,” bad product images, not standardized sizing, and failing to educate customers about the product.
In 2020, the COVID-19 outbreak was one of the major factors that intensified reverse logistics challenges. Even those prepared for growth in returns couldn’t have been ready for the strike of a global pandemic. Today, retailers are operating within a state of continuous disruption driven by the virus outbreak. That’s why understanding why, how, and when buyers return items is vital to navigating such large-scale disruption while maximizing the customer experience and minimizing return volumes. Having a solid reverse logistics supply chain strategy in place is crucial to maintaining organizational health in crisis times.
The Need for Reverse Logistics
What is driving the need for a well-designed reverse logistics supply chain strategy? Since retail product returns are growing, so are the opportunities and challenges for understanding consumer behavior and improving future sales. The opportunities that product returns present to you are:
- Understanding why, how, and when customers return the product they bought is imperative to understand purchasing behavior and improve customer experience. Every product return is an opportunity to learn more about your customers and drive the next sale.
- Product returns are often the result of poorly displaced product images, incorrect fit, and other digital challenges. Also, variances in product sizing contribute to more than 50% of customers returning products due to product fit or size.
- Emerging business models, such as try-on services, rentals, and curate shopping, are compounding item return volumes. These business models are built on the concept that some items ordered will come back, so they condition the customer to make returns. However, the supply chain is not designed to support the consumer behavior that this concept creates.
- Facilitating supply chain transformation. Retailers need to transform their siloed return processes and policies into a holistic returns strategy to turn reverse logistics challenges into business opportunities. Product returns have become one of the most critical supply chain challenges that companies face today. Having the right management strategy is vital to maintaining health operating expenses and inventory turn.
Traditional logistics processes are not good enough because companies usually don’t know when a returned item will arrive, nor are they sure of its condition. Sellers must adapt and build a cross-channel returns strategy that connects the buying cycle from its early stages because customers’ expectations shift to a more holistic purchase experience. Integration of a return strategy into your supply chain transformation system can further improve your value chain and lead to a better return.
The Importance of a Reverse Supply Chain
Just like your outbound logistics process, your reverse logistics operations need to flow smoothly (especially if you sell products that consumers need to try on, like shoes or apparel). Also, products that are sold during the holidays or as gifts may have higher return rates. Your reverse logistics supply chain management is vital for your business’ financial health and plays a vital role in customer retention and satisfaction. Let’s take a look at a few solid reasons for building a sound reverse operations strategy.
- Reverse and forward logistics are equally important
When they place an order, customers want efficient, fast, and transparent fulfillment. But they also want fast and efficient returns management, and if the returns cycle time is too long, they may get frustrated and anxious. But you shouldn’t worry that you’ll lose a customer once they return a product because proper order fulfillment is what also makes them happy. It lets them know what to expect, provides swift refunds, and leads to repeat sales.
- Free returns have proven to boost sales
People love free returns because they give them the confidence to order a product when they’re unsure about color or size. In fact, free shipping and free returns policy are the most motivating factors encouraging people to buy online. For example, Zappos (online shoe and clothing retailer) has built its brand on liberal return policies. On the other hand, if you’re an online mattress retailer, you cannot ship your products if customers have to pay for return shipping (because mattresses are heavy products). When Casper (mattress retailer) wanted to go public, their financial records revealed the actual cost of their “refunds, returns, and discounts” strategy – they lost $92 million in 2018.
So, if you plan to offer free return shipping, you should streamline your reverse logistics operations, or the costs of shipping and receiving products can break your business. A generous return policy (that’s managed and operated well) can drive growth. Zappos was among the first companies to offer a free two-way, 365-day shipping, and return policy. They invited their shoppers to order shoes, try them, and if they’re not happy – send them back. Their best customers have the highest return rates, but they’re also their most profitable customers.
- Keep your merchandise from sitting in the warehouse
When a returned product arrives in the warehouse, it needs to be processed. It is essential to quickly decide which products are damaged beyond repair, which can be repaired or refurbished, and which are undamaged that can be placed back on shelves.
- Environmental benefits
Reverse logistics helps reduce pollution and decreases toxic waste caused during the manufacturing of new products. It’s a globally responsible process that helps our environment, so if you are struggling to get your supply chain green, you can rely on reverse logistics. All aspects of reverse have green implications – you are refurbishing, recycling, and reusing products to sell them in a primary or secondary market, which is environmentally friendly and increases your company’s revenue.
How to Improve Your Reverse Logistics Process
Because reverse logistics is a cost of doing business, you can limit this expense (or even turn it into a profit center) with smart reverse logistics management. Having this process in place, your company can experience reduced losses and unplanned profits. Let’s take a look at some ways to turn reverse logistics into an advantage for your company.
Create a solid returns policy
Your returns policy should protect your profits and meet customer demand. Try to be as generous as possible but also set some clear limits because it has to work for you. For example, some businesses give a deadline for returns, so the more quickly a consumer sends back a product, the higher the chance it will be undamaged and in a resalable condition. Furthermore, you may want to exclude some items from the return process because the margin on sale products may be too low to accept a return.
Assess the condition of returned items as quickly as possible
All your returned items should be segmented or categorized immediately upon return. They can be sorted into several categories. For example, damaged or defective products need proper disposal, repair, recycling, or refurbishment. Items that cannot be sold as new could be either donated or sold at a discount. Items in perfect condition may be ready to hit the shelves again. If you cannot assess your returned items quickly, you may hire a third-party logistics provider (3PL) who can do it for you. The faster you process returned products, the bigger chance you have to sell them again. A fast turnaround provides customers their refunds more quickly, which elevates customer satisfaction and improves the overall customer experience.
Use quality packaging
The packaging or box in which you ship your orders plays a significant role in whether it arrives damaged, broken, crushed, or in good condition. On the other hand, if you send products in oversized boxes that are infill, you will pay higher DIM weight charges and shipping costs. Equip your warehouse or centralized return center with the latest packaging technology that can calculate the optimal box size for each item and create the perfect box to deliver your shipments undamaged.
Market your return products at a discount
Undamaged returned items can be sold to a secondary market at a discount, and as you know, people love discounts. Find a secondary market where you can sell returned items. Some companies create separate sales verticals for these “good as new” products, while others wholesale them to resellers.
Provide an easy return process
When it comes to customer returns, you don’t have to offer too many options but determine which is the most cost-effective reverse logistics strategy and stick with it. Reduce expense and customer service time by guiding your consumers through an easy, automated returns process. Also, negotiate return shipping rates with your carrier to reduce your shipping costs.
Improve product design with return logistics data
Collect data on item returns just like you do on sales by asking customers for feedback on why they’re returning an item. Detecting patterns can help you improve your product design as well as guide your reverse logistics process improvement. You may need to source different materials for a product with a high return rate or need a better way to help customers understand how to use a product. Maybe a garment is not sized correctly, and a note about sizing could help your shoppers make better choices when placing their orders. This information you get from returns can help you improve your products, build your business, and gain a competitive edge.
Track the Right Metrics to Measure Performance
Once you’ve implemented a reverse logistics process, it is vital to monitor its performance and progress. To measure the financial impact of returns on your business, you need to track the right metrics. This is the list of essential metrics to measure the overall performance of your reverse logistics system.
- Product or material wasted. This metric helps measure how many products are scrapped as waste and how many are moved to repairs. The goal of measuring this metric is minimizing product waste.
- Reverse cycle time. This metric helps measure the overall time to process the returns and is the essential measure in reverse logistics. The more streamlined your reverse logistics processes are, the lesser the cycle time will be to process returned items.
- Products sent back for repairs. This metric helps measure the number of items sent back to the supplier or manufacturer because of repair or defect. If you’re getting a high number of returns from a certain supplier, change the supplier.
- The ratio of items returned and resold. How much are your returns, and how many items from these returns have you managed to resell?
- Percentage of cost recovered. Is your company maximizing the profitability from returned products or experiencing a loss out of it? What is the ratio of the product’s value and the amount recovered from its return?
- Reverse distance traveled. Track the average distance traveled by the product sent back to you – the lesser the time, the better.
- Handling cost. To calculate the per item handling price, you need to divide the total cost of your reverse process by the number of returned items processed. This will help you measure the efficiency of the reverse logistics process.
- Total cost of the product. To determine the cost of ownership of a particular product, you need to calculate the original cost of the product, the cost of reselling it, the cost of repairs and scrapping, the reverse logistics cost, and the cost of moving it through the market again.
Today, reverse logistics is one of the fastest-growing areas of the logistics industry that’s experiencing continuous changes in its significance and scope.
Hiring a reverse logistics partner to help you with reverse logistics is an excellent way to create a proper reverse logistics flow for both goods and information. Positive experiences with a product return solidify the retailer-customer relationship and can increase customer loyalty. Redbird Logistics Services is a 3PL company that employs experts in logistics to help you achieve greater customer satisfaction, while fulfillment experts can help you save money on reverse logistics.Feel free to contact us for more information.